Buying a car: Used or new? Miles, money, or both?

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Sooner or later, most of us face the prospect of needing a new set of wheels. That time has come for me — and so I’ve been trying to figure out the most advantageous play for getting the vehicle we want for the most attractive net cost. I’m not sure that I’ve come to a firm conclusion yet, so I figured I’d lay out my thought process and ask for reader input on the best choice. New or used? How would you earn the best combination of miles and money? Note that this post won’t be about negotiating the price — but rather trying to figure out whether it makes more sense to buy new or used and how to earn the best possible reward in exchange for the purchase.

New or Pre-owned?

I’ve long thought that there was no sense in buying a new car that will greatly depreciate the second it comes off the lot. That said, we do like the peace of mind in having a warranty if we’re going to spend five figures on a car. That means we’ve mostly been looking at 2015 and up models that still have some factory warranty.  We came into this process intending to buy used. However, we haven’t totally ruled out buying new — and I’ll lay out why. I’l start by assuming we’re buying a new car for the next few sections of this post (the first couple of scenarios are really the same either way). Fortunately, we have saved up the money for this purchase — meaning that we are in the position to pay cash or finance depending on what works out to be the best deal for us.

For the sake of example, let’s say that this car costs $30,000 new (I intend to spend less, but dealer invoice price is in this realm). Here are the options we see:

  1. Pay cash outright and hope that this helps us negotiate a better deal.
  2. Find a dealer willing to accept the full purchase price on a credit card to earn rewards
  3. Put some amount on a credit card (whatever the dealer allows) and pay the rest with a credit card via Plastiq to max out rewards
  4. Finance through Jeep/Chrysler at 0% for 60/72/84 months (all possibilities according to Jeep.com)

I went into my car buying search assuming we were going for option #1 in order to get the best deal and avoid being in any debt for the purchase. Of course, this is no small purchase — wouldn’t we want to earn miles on this? I wondered the best way to earn rewards on this purchase. After putting some thought into it, I think I’m going to do what I thought least likely from the outset: buy a new car and finance it through the dealer. More on why to follow. First, a quick look at the first three options.

Option 1: Cash Outright

This option is the simplest — find a car, negotiate the price, write a check. No debt, no payments, no stress (from the purchase, anyway). But that earns no miles — that’s no fun :-). Of course, it’s not that there are no options for earning rewards. I could probably use a credit card to buy Visa Gift Cards and then use the gift cards to buy money orders and pay the dealer with a stack of money orders. I’d look like a drug dealer, but not much less-so than turning up with a suitcase full of hundreds.

Option 2: Pay for the car completely on a credit card

This option sounds like fun — find a dealer, negotiate a price, and whip out your card to pay. You occasionally read a story like this about someone paying for an entire vehicle on a credit card. However, those stories are the exception rather than the norm. Most dealers won’t allow you to pay much on a credit card. The Amex Auto Buying program says that they will find dealers who accept “up to the full purchase price” on an Amex, but the truth is that most dealers only accept $2,000-$5,000 on a credit card.

That said, it’s not impossible to find a dealer that accepts the full purchase price on a credit card. I’ve done a lot of Amex True Car requests and only noticed one dealer so far that accepts the entire price on a card, but I did find one:

If I went that route, I’d be putting $30K on a credit card (and of course paying it off immediately with the cash I saved up for the purchase — this would be purely for the purpose of earning miles/rewards). For me, the obvious first option would be the Amex Blue Buisness Plus. At 2X everywhere, the $30K car would earn me 60K Membership Rewards points. That’s an attractive return — easily worth $900-$1200 or more depending on how you use the points. For example, that 60K would be more than enough for a business class flight to Africa or South America using ANA as a transfer partner. The problem: My Blue Business Plus account is new and $30K is well over my starting limit. It’s true that I might be able to call Amex and explain the situation. They may allow me to purchase beyond my limit, provided that I pay back the difference between my limit and the purchase price right away — but it might not be easy. On the other hand, I could easily put the car on my Business Platinum card and earn 1.5X since the purchase is more than $5,000. That would be 45K points — still a decent value. If I had a Freedom Unlimited, that would be another good choice for 1.5X. All of those options are interesting — but paying the entire cost on a credit card relies on me finding the best possible deal from one specific dealer. I’m not sure that will work out.

In a nutshell, that’s not bad if it works out — but I don’t want to base my vehicle search on finding a dealer who accepts a card over focusing my search on the dealer with the best combination of service/price/vehicle I want.

Option 3: Pay some with a credit card at the dealer, pay balance with Plastiq

If I end up buying from a dealer who does not accept a credit card for the full purchase price, but I still want to earn credit card rewards, Plastiq could be another good choice. As you’ll remember, Plastiq is a service that allows you to pay with a credit card for things that normally require a check (like rent, utilities, mortgage, car payment, etc). They tout the service as being able to be used to pay for anything you can buy with a check, and they include things like boats and car payments in their list. I’m not sure if the service could be used to pay for a vehicle outright, but it’s something I’m looking into. I sent them an email and am hoping to get some more information on the process. I intend to report back once we have made a purchase.

In the end, the upside here is that I can shop for the best possible deal and at least theoretically use Plastiq no matter where I buy. Another upside is that I could have them cut multiple checks so I could use different credit cards (helpful for hitting the minimum spend for the sign up bonus on a few cards). A downside would be the fee. However, thanks to Plastiq’s generous referral promotions, I have the fee-free dollars to pay for this purchase without a credit card fee — meaning that the end result is the same as option #1 as far as my wallet is concerned.

Option 4: Finance the car through the dealer at 0% APR for 60, 72 or 84 months

This is where the math starts to get more challenging. Going into this process, I totally ignored the prospect of financing through the dealer. After all, we saved up so we could buy a car we can afford, and that means paying cash, right? As I put more thought into things, I realized that it may not be quite so simple.

Right now, the incentives through Jeep/Chrysler include the ability to finance the car for 0% APR for 60, 72, or 84 months with 10% down. This requires excellent credit. With a score over 800, I expect to be good to go at 0%. After 10% down, this means that on a $30K car, we would be financing $27K. Financed over 84 months, that comes out to 84 payments of $321.43. The rest of this post will assume the 84-month financing plan. Of course, I could make these payments through Plastiq for rewards — so while I wouldn’t take down a huge haul of miles in one shot, I would end up with roughly the same number of miles in the end. The added benefit here would be that I could pay with different credit cards monthly if I wanted. Since we know that new credit card bonuses are the most lucrative way to increase your miles, I could end up earning more miles in the long run by spreading out this spend and using it towards multiple sign up bonuses over the years.

But more interesting to me as I considered this option was what I would do with the remaining money I have saved for this purchase. You’ll sometimes hear finance gurus spout off about times when money is so cheap that it’s better to borrow than use cash. At 0% for 7 years, I wondered: are they right?

So I asked myself this: if I financed this car, what would I do with the money in the meantime to make it work for me? Many would tell me to invest in stocks/mutual funds/ETFs. While those people may not be wrong, I don’t want to invest the money in a way that puts the cash at risk. I’m looking for a “guaranteed” return on a pile of money that will mostly be sitting over the next few years. I went to Doctor of Credit’s page on high-yield bank accounts to see what I could earn on a sum like that. I was pleasantly surprised to see that Consumers Credit Union is offering 4.59% APY on balances up to $20,000.

Earning the full 4.59% APY requires you to jump through a few hoops (more on those in a second) — but that return certainly sounded interesting. Remember that my purchase price in this example is $30K and I’m paying $3K down. That leaves me with $27,000 in cash. Let’s say that I put $20,000 in the Consumers Credit Union 4.59% APY account right away. Let’s say just for the sake of simplicity that I put the remaining $7K in a simple no-rewards checking account and just make my monthly car payment out of that. It will be 21 months before I need to touch the money I’m putting into Consumers Credit Union (21 x $321.43 = $6,750.03).

If interest were to compound annually, that’s a return of $918 per year on a $20,000 balance. That’s almost three free monthly payments earned in year 1. Furthermore, due to that interest income, it would be more than two years before my balance were to drop below $20,000 — meaning that I’d earn more than $1,800 in interest in the first two years of the 7-year loan. And that’s assuming that I earned 0 interest on the remaining $7K in my no-rewards checking account. I also get the added benefit of keeping my cash liquid in case of an emergency. These are the assumptions I’m working on:

  • I start with the $27,000 cash that I owe after paying my $3K down payment
  • I put $20,000 into Consumers Credit Union at 4.59% APY
  • I put the other $7,000 in a non-rewards checking account. I use Plastiq to pay $321.43 monthly and pay my credit card off with this money as long as it lasts.

Playing this all out over the life of the loan requires some math that gets pretty heady. Since you only earn 4.59% on the first $20,000, it’s not as easy as using an APY calculator. The APY calculator will include interest on the interest income — but since that interest will bring the account balance over $20K, you will not earn 4.59% on the interest income (Does that make sense?). So figuring out my final profit gets tricky. But we can get a lowball estimate by doing this:

  • 2 years of payments at $321.43 = $7,714.32.
  • Let’s say I make $7,000 of that from my non-rewards checking account and the other $714 comes out of Year 1’s interest income

Remembering that Year 1’s interest income was $918, that means that after 2 years of payments, I will still have this:

$20,000 initial deposit in Consumers Credit Union
    $204 in leftover interest income from Year 1 ($918 – $714 to top off my $7,000 non-rewards checking and pay 24 payments)
    $918 in interest income from Year 2 (4.59% APY on $20K compounded annually)
$21,122

Remembering that I only earn 4.59% APY on $20,000, let’s say that I remove the excess $1,122 from that account and I stuff it in my mattress. Let’s now say that I make my monthly car payment from the Consumers Credit Union account. So far, I’ve made 2 years of payments; I have another 5 years of payments to make. I found a handy declining balance APY calculator to determine what my final balance would be at the end of the next 5 years. Unfortunately, it wouldn’t let me enter a payment amount that wasn’t an even dollar figure. Therefore, to stick with a lowball estimate, I ran the calculator based on making a monthly payment of $322 and interest compounding annually. Here is my final balance at the end of the next 5 years of payments (when my loan would be completely paid off):

As you can see, when my loan is paid off, that account would still have $3,331 in it. Combine that with the $1,122 in my mattress and I would end up with $4,453 left after paying the full $27,000 that I owed. And that’s assuming that I earned $0 in interest on the excess $7,000 during the first two years of payments and $0 on the $1,112 in my mattress. Realistically, I’d put the mattress money back into the Consumers Credit Union account to keep myself at/near $20K for as long as possible and I’d make at least a bit more out of that. There are bank account options to earn interest on the $7,000 I initially put aside as well. I’m confident that I would end up more than $4,500 ahead in interest by financing the car over paying for it outright — and that comes with the added flexibility of having the funds liquid if a catastrophe strikes.

Furthermore, I don’t have to give up anything in terms of rewards earning. In fact, as mentioned above, I might earn more since more of my send would likely be focused on meeting minimum spend for sign up bonuses. I could still use a credit card through Plastiq to make my monthly payment and use my Consumers Credit Union checking account to pay the credit card bill. In fact, that would help me jump through one of the hoops necessary to earn 4.59% APY.

So what are those hoops you need to jump through for 4.59% APY?

According to Doctor of Credit, you must do the following every month:

  • Complete 12 debit/check card point-of-sale purchases without a PIN
  • Complete one of the following every calendar month:
    • One direct deposit OR
    • One ACH debit OR
    • Pay one bill using Consumers Credit Union online bill pay
  • Access online banking at least once
  • Receive eDocuments (enroll and accept the disclosure)
  • Spend at least $1,000 on Consumers Credit Union Visa credit card purchases

That sounds like somewhat of a headache. Still, 12 debit transactions isn’t too hard — I can go to the grocery store and knock those out in one or two days each month by separating my purchases. Paying a bill is easy as I will eventually be using this account to pay my loan — though, in the beginning, I will have to play the game of depositing and withdrawing once each month. Accessing online banking and receiving eDocuments are easy. Finally, CCU has a number of Visa cards from which to choose. I could earn 1% on one of their cards. I’m sacrificing at least 1% on $12K per year to meet this requirement — or about $120 a year. However, there is a card with a 3% grocery category on the first $6K. And truth be told, we publish a monthly guide on how to increase credit card spend and get most of it back. I’m not too concerned about losing out on any rewards to meet this final requirement.

So used or new?

I did intend to buy a pre-owned car from the beginning. So how does buying new compare? With the model and options we want, it looks like pre-owned will cost us in the neighborhood of $22,000 if we get all of the options we want — maybe less if we settle for something that doesn’t tick all of the boxes. However, if we buy pre-owned, we can’t finance at 0%. The best rates I’ve seen on used car loans are about 1.9% — and typically not for nearly as long of a term. If we were to finance a pre-owned car, we could certainly come out somewhat ahead — but realistically, our earnings would be meager. And we didn’t intend to finance a pre-owned car. We came into this intending to pay outright for a pre-owned 2015 or newer.

However, if we buy a pre-owned car outright, we would have to consider the following points:

  1. It comes at the opportunity cost of earning ~$4500 in interest
  2. We lose the flexibility of having cash in the bank
  3. We have less warranty vs a new car
  4. Lower final value at the end of 7 years (whether we sell it or trade it in)
  5. We lose an easy opportunity to work towards the minimum spend on many cards over the next 7 years

Ignoring #2-#5. the $4500 lost interest earning brings the net cost of used vs new awfully close together. Many sign up bonuses offer more than 10X per dollar on the opening spend (e.g. 50,000 sign up bonus for $3,000 spend = 16.666X). Considering the opportunity cost of using $27K spend in one shot versus spreading it out over multiple opportunities to earn 10X or more, the cost of buying used creeps infinitely closer to the cost of new. If we then value numbers 2 through 4 at anything, it seems to me that buying new makes more sense.

Flaws in my logic

First of all, this post works on a pretty narrow set of presumptions. If I were comparing a slightly older car, for example, the price differential would be wider — and buying used might mean a significant savings. Not all makes and models will be as close in price between a new car and a 2015. We don’t know that Consumers Credit Union will continue to pay out 4.59% APY over the next 7 years — in fact, they have changed their rate in the past and there is no guarantee that they won’t change it tomorrow. I recognize that those variables are not nearly as static as I made them out to be. For those reasons, I’m still not sure I know the correct answer.

And I know that many readers have probably considered the same conundrum at some point before. I imagine a few of you have solved for X and determined the best possible answer. So I ask you: what do you think? Used or new? Miles now or interest + miles later? How would you proceed in my shoes — or how have you done it to maximize your return on a purchase that we all know will depreciate in value more quickly than any profit we can earn. What are your thoughts?

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