How Much of Your Car Should You Finance? Zero percent.

[Stretch002]

Re: How Much of Your Car Should You Finance? Zero percent.

Looks like a popular thread! It certainly offers very good advice. Thanks to everyone for indulging me.

I have decided to pay the car off. Thinking of it as an investment that pays 6% AFTER taxes is what did it for me. A rock-solid investment yielding that figure after taxes is hard to come by. Also, after having typed everything out I do not think I need the additional liquidity at this time. Thanks everyone!

[Jim Nickerson]

Re: How Much of Your Car Should You Finance? Zero percent.

From the purely for-what-it-is-worth department, I just noted that this tread has had over 22,000 views, assuming the view-counter has not been gimpy.

What does that say? A whole lot of people are buying cars?

[Jim Nickerson]

Re: How Much of Your Car Should You Finance? Zero percent.

Looks like I need to clarify a bit. Please forgive me if this is too much information.

We have a household income between $200k - $300k per year. We have close to $400,000 in various liquid investments not related to retirement. We fully fund our 401k's for the full 15k per year.


I'd like to point out that I did extensive research and much thinking before I bought my childhood dream car. This was not a thoughtless and spur of the moment decision. This is a car I will be keeping forever. My wife I have the money to pay it off now or later. I am trying to figure out if it is better to keep the money invested or to simply pay off the car loan. We are in our mid 30's if that makes any difference...

Thanks in advance for your help!

Let me also offer my personal anecdote. At the market top in 2000, I leased a Lexus SUV, the small one, thinking shit, with the money I have been making in the stock market, why liquidate anything, rather keep it invested while I ride to the moon.

BIG MISTAKE!

I could have paid cash then for 25 Lexuses, stored them, and sold them off over the next 2 years and come out ahead. It may be a mistake to think what you have invested now is going to be worth more later.

I will say this about the Lexus, which by the way I bought at the end of the three year lease--don't anyone tell me how bad this was as far as abright financial move--but, that car was undoubtedly the best car I have yet owned. In 5.5 years, it has NOTHING go wrong with it, except a plastic plug that held an interior panel in place popped out and was lost--cost to replace it $1.50.

Thinking back on my thinking at the time, it was pure greed in me that kept me from liquidating some holdings and paying cash for the car. It turned out, that I was more than sufficiently punished for my greed.

[jk]

Re: How Much of Your Car Should You Finance? Zero percent.

Well, that "bit" of information does change what I think. Personally if I were making that much money, I would pay the mother off and not have to worry about it. Why pay any interest if you cannot deduct it.

pay it off. think of it as a sure-thing investment with a rate of return equal to the rate of the loan, after taxes.

[Jim Nickerson]

Re: How Much of Your Car Should You Finance? Zero percent.

Looks like I need to clarify a bit. Please forgive me if this is too much information.

We have a household income between $200k - $300k per year. We have close to $400,000 in various liquid investments not related to retirement. We fully fund our 401k's for the full 15k per year.


I'd like to point out that I did extensive research and much thinking before I bought my childhood dream car. This was not a thoughtless and spur of the moment decision. This is a car I will be keeping forever. My wife I have the money to pay it off now or later. I am trying to figure out if it is better to keep the money invested or to simply pay off the car loan. We are in our mid 30's if that makes any difference...

Thanks in advance for your help!

Well, that "bit" of information does change what I think. Personally if I were making that much money, I would pay the mother off and not have to worry about it. Why pay any interest if you cannot deduct it.

[Stretch002]

Re: How Much of Your Car Should You Finance? Zero percent.

Looks like I need to clarify a bit. Please forgive me if this is too much information.

We have a household income between $200k - $300k per year. We have close to $400,000 in various liquid investments not related to retirement. We fully fund our 401k's for the full 15k per year.


I'd like to point out that I did extensive research and much thinking before I bought my childhood dream car. This was not a thoughtless and spur of the moment decision. This is a car I will be keeping forever. My wife I have the money to pay it off now or later. I am trying to figure out if it is better to keep the money invested or to simply pay off the car loan. We are in our mid 30's if that makes any difference...

Thanks in advance for your help!

[jk]

Re: How Much of Your Car Should You Finance? Zero percent.

prior to last year i'd never bought a car for more than about $28k. last year i bought one for about $32k [a subaru legacy gt turbo wagon - i love it! high safety ratings/features and very, very fast, 4wd, i'm digressing...] i'm a physician, own a house, make good money, have a reasonable amount of savings/investments and am almost done paying for all my kids' tuitions. so anyway, it's hard for me to imagine someone who would buy a $50k car needing to ask this kind of question. on the other hand, i met someone once who really, really loved cars and said how his ideal was to own a car that was worth more than his [current] house. so i guess you really really love cars, and made a value judgement. the only thing that would make such a judgement a "mistake" is if you made the decision thoughtlessly. otherwise, it's just a value judgement.

don't forget cd rates might drop instead of rise, so your cost of remaining liquid could be higher than you calculate. beyond that, it's really impossible to answer your question without knowing whether you have other assets or sources of credit. in general, car loans are not great loans, and you get penalized for paying them off early via the way they calculate the pay off. [they are not computed like mortgages.] i think that you are early enough in the life of the loan that paying it off doesn't get you as screwed as you would be if you paid if off in the middle, though. [the lender should be able to provide you with payoff amounts for different points in the life of the loan, and you could compare it with the amounts derived from a mortgage calculator.] i'd pay off as much as i could, keeping some liquid reserve, as suggested by jim in the last post.

[Jim Nickerson]

Re: How Much of Your Car Should You Finance? Zero percent.

Sorry to dig up an older thread. But I would like to solicit some advice and discussion on my personal scenario. I have indeed purchased a new car this past year...an expensive one at that. In my case I can pay for the car in cash or try and out perform the market rate of the car loan.

See if my math holds up:

Purchase Price: $50,000
Interest Rate: 6%
Total Cost after 60 months: $65,000

Liquid assets: $50,000 in a CD
Investment returns at 5.25% (annual): $2,625
Taxes on Investment returns (30% bracket): $787
Net from Investing funds: $1,838
Net funds after 60 months investing: $9,190
Asset Cost minus Investment gain: $55,810

So in my case the question becomes: is it better to spend the extra $5800 over five years to stay liquid and hope the FED raises rates to the point that my CD’s will outperform the loan I have taken out on the car? How high does that rate need to go in order for me to break even with the 30% in taxes I am forced to pay on the gains? What would you do here?

Thus far I am thinking that paying off the car is the correct choice.

It seems to me that possibly you screwed yourself in the first place by buying a car costing $50K if 50K is all you have in liquid assets, and I am not positive that is what you inferred.

I think people ought to retain some cash (cd's, etc.) in case of calamity.

Heavens forbid, I should be in your place, but I guess if I were, and $50K is all I had, I would try to figure out what 6 month's living expenses would be, retain that in savings and pay the rest early to cut down on interest because it isn't deductible of course. If you have a rock-solid job, which I certainly hope you do, then add something more to each month's payments and pay that bugger off as soon as you can.

Or get a second mortgage if you can at a decent rate and closing costs, and then at least you can deduct the interest.

Or win the Lotto, and pay off the car note.

I personally think we are going to see lower rates before we see much higher ones, which is just opinion. If you owed $50K over 15 years, then perhaps after a drop in rates, there will be much higher rates and over the long run (15yrs.) you might come out repaying the bank with inflated dollars, remembering, however, that most of the interest is paid early on.

Personally, I think you made a bad choice. Good judgement comes with experience and experience comes from bad judgement.

Good luck.

[Stretch002]

Re: How Much of Your Car Should You Finance? Zero percent.

Sorry to dig up an older thread. But I would like to solicit some advice and discussion on my personal scenario. I have indeed purchased a new car this past year...an expensive one at that. In my case I can pay for the car in cash or try and out perform the market rate of the car loan.

See if my math holds up:

Purchase Price: $50,000
Interest Rate: 6%
Total Cost after 60 months: $65,000

Liquid assets: $50,000 in a CD
Investment returns at 5.25% (annual): $2,625
Taxes on Investment returns (30% bracket): $787
Net from Investing funds: $1,838
Net funds after 60 months investing: $9,190
Asset Cost minus Investment gain: $55,810

So in my case the question becomes: is it better to spend the extra $5800 over five years to stay liquid and hope the FED raises rates to the point that my CD’s will outperform the loan I have taken out on the car? How high does that rate need to go in order for me to break even with the 30% in taxes I am forced to pay on the gains? What would you do here?

Thus far I am thinking that paying off the car is the correct choice.

[DemonD]

Re: How Much of Your Car Should You Finance? Zero percent.

I own a 2001 corolla. It's got 108k miles. My mechanic said "Oh, you're just breaking it in." I probably won't ever sell it, and I'm certainly not going to get another car until my student loan debt is payed off and I own some sort of real estate (real estate I can actually afford).

My main point in this post was I wanted to ask about this:

Nice! I "felt" like I was making money, on a car bought new, no less, the most notoriously money-losing purchase a person can make. At that stage of an inflation, everyone thinks they're getting richer, as nominal incomes are rising along with rates on CDs and other interest bearing securities, and hard assets. The problem is that in nominal (inflation-adjusted) terms (emphasis added), the purchasing power of these assets and securities is declining. Once the average person realized that, which they did around the year I sold that Honda, the rush to hard asset and the gold bubble began.

Shouldn't that say "The problem is that in real (inflation-adjusted) terms..."

[akrowne]

Re: How Much of Your Car Should You Finance? Zero percent.

A small recent commentary of mine on "the hidden costs of financing" makes an excellent complement to this EJ article.

[Jim Nickerson]

Re: How Much of Your Car Should You Finance? Zero percent.

Good grief Jim ... a little playful satire on the governments' tactics vis-à-vis tobacco ... the advancement of democratic totalitarianism ... ?

Good grief, Finster, I see nothing satirical about choices individuals may make as it relates to their own or family's safety, nor do I see any governmental tactic in individuals arriving at such choices, nor do I see anything advancing democratic totalitarianism (whatever that is) in individuals' chosing whether they wish more safety or more money. Perhaps you had that spiel written already just waiting to paste it into some thread in order to espouse something libertarian (whatever that is). It seems you got it pasted into the wrong thread.

[Finster]

Re: How Much of Your Car Should You Finance? Zero percent.

Finster, what is your point?

Good grief Jim ... a little playful satire on the governments' tactics vis-à-vis tobacco ... the advancement of democratic totalitarianism ... ?

[Spartacus]

Re: How Much of Your Car Should You Finance? Zero percent.

they're not new - they've been the standard for car racing (real racing, not illegal street racers) for a long time.

they're basically extra seat belts - an extra strap that prevents you from going out the side, and another extra strap that comes up between the legs, in front of the jewels, that prevents you from going under, (the standard belts allow this - it's worse when worn incorrectly, but even when worn correctly, going under can be a problem).

They're available as after-market additions.

You probably never heard of them because they're expensive and so rare - used only by ultra-nutty safety freaks and race car drivers.

I quit practicing in 1991. I have no knowledge of 5 point harnesses.

[BK]

Re: Corolla alternative- Infiniti I35

EJ,

Check out a 2003 Infiniti I35 - 30-31 MPG highway - even with the AC running full tilt-
looks more expensive than it is.....(or at least I think so...)
Good size - Can fit four adults and a Child -
Lots of Air bags - and theat good-ole Japanese realiability.

Not as dramatic as a Corolla - but, a nice ride.

Happy Thanksgiving