I am going to be purchasing a gently used car soon. My current car is starting to become a money pit, and if I have fork over another $1000 for a huge repair then I will begin to approach that threshold where the car isn't worth repairing.
I have budgeted $10,000 to use for a down payment + my trade in which should get me a monthly payment at about 10% of my income in the range of car prices I am looking at. With interest rates being so low....A friend has advised me to not blow such a huge chunk of money on a down payment and instead only use $5000 for the down payment and keep the other $5000 in the bank, and use it to offset the higher monthly payments while allowing that money to double as my emergency fund. Thus freeing up more of my other savings to invest more aggressively and keeping my cash flexibility over the course of the car loan. I keep my cars for a long time, well past their loan terms, and have near perfect credit.
$10K down = $250 monthly payment
$5K down = $350 monthly payment. Subtract the $100 difference from $5000 emergency fund over a 5 year loan. While still saving to keep E-fund topped off.
I could afford the increased payments with out sipping from the Emergency Fund, but I just balk at the idea of having a car payment over $250 or 10% of my monthly earnings after tax. I like to keep my monthly obligations very low, which allows me to save save save and have my money working for me.
Is this a good strategy for stretching my money and keeping my cash flexibility?
I am drawn to this suggestion, Cash is King in this new economy, and part of me says it makes no sense to apply such a large amount of funds at one time to a depreciating asset. There seems to be a permanent level of uncertainty in the job market for everyone. Also the amount of extra interest is in my opinion not a big deal. I will probably be applying extra payments to pay this loan off quickly.