Vroom, Vroom

Written by Allie Schmidt, Financial Advisor, CFP®, CPA

Cars…Some people love them, some loathe them.  If it were up to my wife Stacy, we would bike everywhere.  But, realistically, we need two cars.  We both have 2009 mid-size SUVs.  Well I should say we did have those cars, up until last weekend.  It was time to upgrade one of them.  So, we woke up on Saturday morning and headed down south to the car dealership.  Now I don’t mind shopping for cars, I actually kind of like it. Stacy, on the other hand, would rather do pretty much anything else, so we were going to try to make this quick.

While we were driving down there, we had a conversation that I have pretty often with clients about whether to pay cash, finance, or lease a car.  Here are a couple things you could consider if you’re in the same boat (err…situation)…

• Cash:  Rates.  If you read my articles, first, thank you, but also you probably have started to notice a theme when it comes to rates (especially these historically low rates).  How much to borrow has everything to do with interest rates, and cars are no different.  The time to consider paying cash for a car or a larger downpayment is when your rate comes back higher than you’re able to make elsewhere.  For example, if you’re a very conservative investor, preferring bonds and cash to other investments, and the rate you qualify for is 5%,  I would consider paying cash.  At today’s rates, likely the conservative investments you have may not earn 5% over the life of that car loan, so you’d have more bang for your buck by paying cash.
• Financing:  Rates.  This just represents the other side of the rate discussion.  If you’re more risk tolerant and prefer equity/stock or real estate investments to cash/bonds, then I would look to what you could make on the money you’re saving by not paying cash for the car.  Consider financing if the return on your investments could likely exceed the cost of the loan.  Another reason to finance would be the rates on any other loans you have are higher.  If you’re able to get financing on your car for less than other debt you hold, consider taking the loan and paying other debt down first.  If your mortgage, student loans, credit cards, OR any other type of debt interest rate exceeds that of the car loan, there’s a pretty good argument that those other loans are a better place for your cash than the car.
• Leasing: Cash flow.  Leasing a car will likely lead to lower monthly payments, but for good reason, you’re not buying the car, you’re just borrowing it.  If cash flow is tight, leasing can be a way to have lower monthly car payments.  Another good reason for leasing is a short term need for a certain car.  If you know you’ll need to either upsize or downsize in a couple years, leasing a car allows you to better estimate your out of pocket cost for the current car before making a change, since you don’t have to sell the car at an unknown price.  One downside to leasing over long periods of time is with this approach you’ll always have a car payment.

So, all these things considered, what did we do?  We ended up with a true mom mobile, a little white all wheel drive wagon to get the three of us around.  We opted to finance the car at 0.99% because, to me, that is almost free money.  Our home mortgage is under 4%, so in theory, we’d get more bang for our buck putting cash toward the mortgage not the car. But at under 4% and tax deductible, we won’t be doing that either.  For us, it makes more sense to stay invested for the long-run because I feel very confident we’ll be able to make considerably more than 4% on average over the next several decades.  As always this is certainly not a recommendation and should not be considered investment, tax, or even life advice. Make sure to consult with your financial advisor for feedback on your specific situation.

For more information on interest rates, inflation, or other financial planning strategies, check out our blog at www.hdwscolorado.com/blog.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. All investing involves risk including loss of principal. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through HD Wealth Strategies, a registered investment advisor and separate entity from LPL Financial.