Is Dave Ramsey Right When it Comes to Cars?

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Dave Ramsey thinks you should buy cars in all cash. I used to think that was the best thing to do, but wonder if a payment is ok if you invest the cash.

There is an old debate about buying a car in cash vs. having a car payment with a low interest rate and investing in the stock market instead. Two of my favorite financial experts disagree on this topic. The first is Dave Ramsey, who believes in having no debt whatsoever. The second is my father-in-law, who I’ve written about before.

My father-in-law is fine carrying debt but only if the math is working in his favor. Earlier this month, I flew home to Louisiana and was talking about money with my father-in-law. He and I are BFFs, two peas in a pod if you will, and I was asking him about paying for my next car in cash since both my vehicles have over 200,000 miles on them.

He surprised me when he said I didn’t have to pay for one in cash, as long as I was actively investing. This is the man who paid cash for his house, so I didn’t expect this advice from him, and it goes directly against Dave Ramsey’s advice, who I listen to every day. Cue a major internal conflict.

The Problem


I want to be clear. The main problem with the idea of making more in the market and having a car payment is that people spew this idea all the time but then never, ever actually invest.

They think they sound smart when they say they can get a better return in the market which is why they don’t mind having a two percent interest rate on their car and yet they never invest the extra cash in a brokerage account.

If you think the same thing, here’s our list of the best online brokerages to find one that works for you.

My father-in-law is totally different because he’s the type of person who actually tracks every penny. He even tracks his mileage and gas after every fill up. He loves lists and charts and graphs. This is his thing. He told me a story about buying a van when he and my mother-in-law had their 4th child 25 years ago.

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They saved $13,000 to buy a van in cash but then got such a great interest rate he decided to have a car payment and put the $13,000 in cash in a mutual fund instead. That mutual fund is worth over $100,000 now and the van’s monthly payment was minimal. It was a decision that made a big impact.

One could argue, though, that if you can save up $13,000 in cash then you can do it again and again and just decide to use some of it to purchase your needs and some of it to invest, but I just love the story and the example.

What I Think Now


So, I have to say my resolve is cracking in terms of buying a car in cash; however, it’s still a big goal of mine. The car buying statistics lately aren’t looking good. In fact, a recent article in Fortune mentions it might be the next bubble.

They said, “The average duration of a new-car loan rose to a record 66 months and a record 62 months for used cars, as lenders wrote more five-year, six-year and seven-year loans so that buyers could afford the monthly payments.” That’s also not to mention the fact that the average car payment is now over $500 per month – ouch!

*Related: Not certain if you should buy or lease? Check out our leasing a car vs. buying a car guide to learn which is best for you.*

This is definitely a slippery slope. I find that when people focus way too much on the monthly payment, it’s a detriment as they can get caught in a payment mentality. Cars decrease in value rapidly, and when you have a loan as long as six or seven years, you can easily get underwater on your loan – a serious problem if the car is wrecked or totaled.

Dave Ramsey thinks you should buy cars in all cash. I used to think that was the best thing to do, but wonder if a payment is ok if you invest the cash.

It’s Up to You, not dave ramsey or anyone else


After thinking more about this debate, doing my research and talking to my father-in-law, I’m definitely less judgmental about people who have car loans and realize that if someone is smart with their finances, they could come out on top by investing the money instead.

However, I have so much debt already with my husband’s medical school loans that I hate the idea of adding to the pile. So, I will continue adding to my car savings fund each month and when one of our cars decides to croak, I’ll hopefully have enough to pay for one in cash.

*Related: Want to cut the cord? Read our review of the Amazon Fire Stick to see how it can help you save $50+ per month on cable.*

I’ve found the best way to start saving to pay cash for a car is to put what you figure a car payment you can handle away in a savings account each month. This allows you to build up the savings needed to buy a car in cash. The key is to find a bank that has no minimum balance requirements and pays a decent interest.

Chime is one such bank as they have no minimum balance request, and they round up each purchase to the nearest dollar and places that amount in your savings account

If you’re like me and you want to save up for a car in cash but aren’t sure if you can save up enough by the time you’ll need to actually buy the car, start tracking your expenses and income fastidiously. If you need ideas to save extra money, check out our list of 35 ways to save money every month to give you some ideas.

You’ll know where every nickel is going and will be able to accurately predict how long it will take you (and what you’ll have to sacrifice) to save up for that new to you car. And if you don’t like Excel, there are many other tools that make it easy to see exactly what you’re spending and saving.


Additional resource: If you’re in a similar situation trying to determine if you should buy a car in cash or take on a car payment, then check out my favorite tool – Personal Capital. Completely free, it allows you to track your spending, monitor your bank and investment accounts so you can make informed decisions that are right for your specific situation.

Open your free Personal Capital account today!


What do you think is better – paying for a car in cash or taking the lower rate loan and invest in the market instead? Have you ever paid for a car in cash? When was the last time you intended to invest but didn’t follow through on your intentions?

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Catherine Alford is the go to personal finance expert for parents who want to better their finances and take on a more active financial role in their families.


  • Hannah says:

    Although some people are disciplined enough to invest, most people use car loans and credit in general to spend more than they should which generally undoes the benefit of investing along the way.

    Personally, I prefer paying cash for cars but I also don’t mind driving junky vehicles.

  • Laurie @thefrugalfarmer says:

    I’m paranoid (what if the market crashes indefinitely?) so I’d for sure pay for the car in cash. I like simple deals, but they’re not always the most profitable, that’s for sure. LOVE your FIL’s story about the van and the mutual fund – very cool!

  • MomofTwoPreciousGirls says:

    I think if you are someone that has the knowledge to care for a used car then go for it. EVERY SINGLE USED CAR we have ever bought has been a money pit. I rather use someone else’s money and have a reliable vehicle. Especially with two kids to drive around.

    Again this has been our experience probably because we don’t have the knowledge or know a trusted person with the knowledge. We understand the basics of a car but have no idea whether what we we are looking at is good or bad! One car got a flat on the way home from buying it. Then we found out the tires were destroyed costing $700 more dollars before it even got to our driveway!

    • Cat says:

      Interesting. That really sucks.

      • Andy says:

        I only buy “used” cars from reputable new car dealers. They cost a little more, but someone with experience went through them and they often have a 30-90 day warranty. I’ve had bad experiences with almost every “XYZ Used Car Lot” purchase as well…!

  • Emily @ JohnJaneDoe says:

    Deciding to take on debt so you free up money for investing is a gamble. It might pay off, if you’re investments have big gains. Low interest rates mean that those who have done it may have been successful with the strategy, especially if they have good credit.

    But if the stock market tank, income drops, or other expenses rise, the person following the invest + debt strategy is in trouble. That’s a lot of risk.

  • Brian @DebtDiscipline says:

    I own two paid for in cash cars and I would not borrow money in the future to purchase another. I just like not having another monthly payment. I think you have to factor net worth and overall income into the equation as well. You can get the best deal on a 2-3 year old car, so why no take advantage of it and you have more negotiating power when you buy with cash.

  • Kim says:

    After replacing both our vehicles this year, I’ve had this discussion multiple times. I have to agree with Dave. We bought two newish cars, a 2012 and 2014, in cash that should last for at least ten years. I get that a payment may it be a bad way to buy but we don’t ever want to be shacked like that again and it motivates us to ramp up savings to replace that cash that was spent. However, if we’d had to stop investing altogether to swing buying cars, I would have preferred the payment.

  • Joe says:

    We paid cash for our 2010 Mazda 5. It was great to not have to worry about monthly car payments.
    Previously, we went with loans, but we’re paying cash from now on. It forced us to put off the purchase and gave us more time to shop around.

  • Kalie @ Pretend to Be Poor says:

    I like how you bring up a variety of viewpoints and angles here instead of treating it just from one side.

    We have never had a car loan and never will. My husband is great at fixing cars, though he is not a mechanic. We once bought a $750 car, drove it for four years, and sold it for $500. Never paid a shop for repairs. Our current cars are worth a bit more, but we just don’t pay much for our cars so it wouldn’t make a huge difference to invest it.

  • Greg says:

    Insane to borrow to own a depreciating asset. You can often get a better deal paying cash.

    That $13,000 car can probably be yours for $12k cash. A guaranteed return and a psychological lift from avoiding debt is the way to go.

  • The Vagabond says:

    Father-in-Law is definitely my kind of people! There’s due diligence to be done when buying a used car in cash, but it’s relatively simple to do. I recently came to the realization that my current car (paid for in cash) is probably the last car I will own for a very long time, since our FIRE plans involve starting with slow travel to a lot of places where we can take the Metro/Subway to anything we could possibly want, and rent a car for the few exceptions. It’ll be glorious!

  • Mr. Groovy says:

    Sorry, Cat. This isn’t very scientific. I hate cars and I hate debt. So I’m in the cash for cars camp. I do see how a disciplined investor can take advantage of low interest rates, though.

  • Kristi @ Femme Frugality says:

    That’s a great story about your FIL, Cat. I am pretty staunchly against any more debt right now as well, so I would most likely decide to buy a new car in cash if I could.

  • Sarah says:

    I like your father-in-law 🙂

    If you have the money to pay cash but actually DO invest it instead and take out a loan, I think that’s great!

    Here’s our situation: I bought my first car with my dad as a cosigner. I had a $15K loan and the payment was $250 for five years. After getting married, we paid it off within three years.

    Now, we have our SUV which is a six-year loan (yuck) at $336/month. However, we pay $500/month and plan to completely pay it off in 2016. We also have my husband’s work truck which we paid for in cash. Looking back, the SUV was a mistake because of how pricey it was. We do plan on driving that thing into the ground, though, so it is what it is.

    Finances are so tricky and personal. This was a great post that sheds light on the fact that there is no “right” way to do things necessarily. You have to do what works for you and your family!

    Thanks, Cat!!

  • Jason Butler says:

    I’ve had 2 car notes in my life. I hated having to pay monthly payments. I think I’m going the cash route for my next vehicle.

  • Alexandria says:

    I see this every day, but it’s not a logical argument. Even if you are disciplined and actually invest the money. Either you invest $10k up front and then you spend the next several years paying back the $10k + interest (which is $10k that you can’t invest. So isn’t it all a wash in the end?). OR… You pay $10k cash for the car and you then turn around and invest $10k+ interest, over the years, since you have no car payment.

    Whatever our car loans would be, we have always saved and invested. It just drives me crazy when people don’t include the math that when you take a loan you have to pay it back at some point. !! Having never had a car loan, it’s obvious to me that would cut into the money we invest every single month. Which it makes either option more or less the same in the end.

    Since none of that factors at all into why we pay cash for our cars… The reason for us is that it’s far less hassle to pay cash. Get the title up front, no insurance company involved, and no monthly payments to worry about. I think we are about as disciplined as can be financially but I could easily see paying 30% – 50% more for a car if we were willing to finance it. It’s just too easy to justify borrowing more when you don’t have to pay for it up front. This is why we pay cash and I know we are wealthier for it in the long run.

    • Adam says:

      I agree that there is a large psychological aspect to it that is more powerful than the difference you could attain by financing and investing the money (assuming you can outperform the loan interest rate over the short period). I think people are more likely to overspend on a car if they are financing. If you actually have to part with the money the day you buy the car you may reconsider waving goodbye to $30-$40K.

  • kristi says:

    My husband and I have bought several cars with cash. He now wants a new truck because he can’t find a Ford F-250 with w gas motor and an 8 foot bed (go ahead try! I dare you!) I am still trying to find the right balance of when do you buy a new one? I am trying to keep our vehicles less than 5 years old because I’m a family doctor in a rural area and take call from home. So I can’t break down or it might cost someone their life or me my job… I would love to hear from others who feel that reliability is worth paying extra with. And how do you factor life and health and experiences with family into that? One of our loans was to buy a reliable vehicle after our so broke his leg in a car wreck and was depressed so we went on a trip cross country. It was great for all of us and probably saved his life! No answers, just observations and questions and a listening ear for anybody who has thought deeply about these things.

  • Peter says:

    Hi, You really do need to add a caveat to your father-in-law’s advice. Yes it is actually financially prudent to buy a car on low finance rate and invest the money you would have spent on it. If the 2 interest rates are far enough apart including the tax you’ll pay on your investment. But there’s big caveat: You need to already have the cash. When you invest you are inherently taking on risk and the level of risk is proportional to the return. Having the equity of the investment as a backup to your ability to service the loan covers that risk.
    More than that tho’, is the actual reason for Dave’s advice. It’s not ‘financial’ advice, it’s behavioral advice.
    When people make direct comparisons with Dave Ramsey’s method they are ignoring the fundamental reason for his advice – It’s directed at people who are in debt in the first place, so his advice is MORE about changing behavior than it is about the numbers.

  • Eric R says:

    “They think they sound smart when they say they can get a better return in the market which is why they don’t mind having a 2 percent interest rate on their car and yet they never invest the extra cash in a brokerage account.”

    Sure, but even if they don’t end up investing, what does the 2% APR cost them? On a $30k loan at 2% for 60 months, I get $1549.97 in total interest.

    Not that I’d throw away $310 per year, but you certainly don’t need to stick all of that $30k into the S&P to break even. Figuring a conservative 7% average, I get that you’d only have to invest $1064 at the time of the loan to break-even.

    If you haven’t maxed out your 401k, put $100 per month into that and you’ll get that $1500 interest back just in savings on your taxes. Plus you’d be up another $1159 averaging a 7% return.

    Plus if you are leaving some match on the table, even at 50%, your $6000 in would be worth $10700 after 60 months [plus the $1500 in saved taxes].

    I’m sure most don’t do any of this, so point taken 🙂

    • John Schmoll says:

      I completely understand your point Eric, and it makes sense on one level. However, what it misses is debt is an emotional thing. For myself, I hate debt and it makes little sense to take a loan out on a depreciating asset. If possible, cash for a car is the way to go IMO.

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