Overhaulin'

Should I cash out a CD to buy a car?

OK I have a certificate of deposit ( not matured yet ). It pays about 5% interest. If I were to borrow cash to buy a car I think it would cost me 3% interest. So i'm thinking I should borrow the money at the lower rate to buy a car right? Sorry for the dumb question but math isn't my forte'.

Public Comments

1. When you sell a cd through your bank you can lose 3 to 6 months worth of interest. Sorry, never heard of auto financing at 3%. If a dealer is offering this low of a rate, he is simply adding it to the price of the car. Now, cash is king when buying a car. They will not let you walk away. They called me for 2 nights, until finally they gave in the price I wanted. Don't let the car financing people pull one over your eyes. Research how to buy a car for cash and negotiating a good deal. Note: If you have a brokered cd - you realize it would sell in an instant since at 5% anyone would grab it. You would end up making a huge profit on that cd. /
2. well you probably pay tax on the CD interest so the effective after-tax yield may be less than 4%. 3% interest on an auto loan is pretty low, but if you must finance 15k or more to get that rate... run away. cash in your CD and buy a beater; get liability insurance only.
3. no way you will get a car loan at only 3% - the only time dealers offer something like that (on new cars only) is if you finance it for 24-36 months, which would make your monthly payments extremely high compared to a normal 5 yr car loan - unless your credit score is 750+ I would be surprised if you got a loan as low as 7% FYI - cashing in a bank CD early will hit you will early redemption charges - and used car loans are always higher interest rate than new car loans - forget anywhere near 3% is you're looking at used cars
4. You should NEVER borrow to buy a car. CDs are normally a poor place to put money and I seriously doubt you can find an auto loan at 3% OR a CD at 5%. According to Bankrate.com, the going rate for LONG TERM CDs is under 3% and the going rate for auto loans is over 6%. Auto loan rates lower than CD rate are UNHEARD OF.
5. A CD that had been purchased a few years ago can have 5% interest rates. Determine when your CD matures (can you wait until then) and also find out your bank's policy for cashing the CD in early. Normally you will lose the last 3 months of interest but some banks are worse and some better. Your car dealer is offering a low interest rate by increasing the price of the car. Shop around and find out what the price of the car would be if you paid all cash. What the car dealer is doing is perhaps he wants to sell the car for $20k and has the ability to offer a loan at 6% interest for 5 years. But if he gets you to buy the car for $22k at a 3% interest rate - he will make slightly more money than the straight $20k deal. Car dealers never have the best car loan rates. You should buy a car from a car dealer and "buy" a loan after shopping around at a several banks and credit unions. In your case, assuming cashing in your CD is only a 3 month penalty - I would cash in your CD, buy the car and then on a monthly basis save the equivalent of a "car payment" so when this one wears out - you have enough money to buy another car. By the way, a CD is a great place to save money that you want / need to have in 2-3 years. Stocks are great investments if you plan to save and not touch the principle for 10-20 years or more.