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Frugal Shopper: Should I Pay Cash For My Next Car? Page 3

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Right now, however, with low interest rates and low rates of return for other types of investment, there's about a 0.78-percent opportunity cost (about what you'd get with the money to be used toward the loan in a savings account), so it makes paying cash for a vehicle a much better deal than, say, five years ago.

Running the numbers: Cash makes more sense than a few years ago

Wurster calculated out the numbers for us (see the chart below) on a couple of models likely to be shopped by families watching their wallets: a 2010 Ford Fusion SE four-cylinder sedan, and a 2010 Hyundai Elantra Blue four-cylinder sedan. Using a typical 60-month loan at the going rate, about 6.13 percent, the results are surprising: Over five years, all else the same, you'll end up paying about $2,000 more on the $21,775 Fusion or $1,300 more on the $14,145 Elantra over the long run, just by financing rather than paying cash.

But of course, if you're a smart investor, you might be able to earn a lot more than 0.78 percent on the funds you have available.

Put simply, as long as your auto-finance rate exceeds what you could (or at least might) receive from an alternative investment, it will make sense to pay cash for your vehicle.

Of course there are lots of exceptions to the rule. Would you rather have that money free just in case? And what if interest rates or earnings on investments suddenly become much more attractive during the course of your loan? Not likely, but possible. And then there are other sweetheart incentives that knock money off the price only if you finance through an automaker's captive finance company. In that case—if there's a $1,500 incentive, for instance—it could pay off.

Although some will insist one way or the other, there's no single answer to whether paying cash is smart or not. Run your numbers thinking about what we've discussed, and decide for yourself.

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See below for Vincentric's comparisons on financing for five years versus paying cash:

Ford Fusion SE and Hyundai Elantra Blue - cash vs financing - from Vincentric

Ford Fusion SE and Hyundai Elantra Blue - cash vs financing - from Vincentric

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