Tax Tip: Check Out College Tax Benefits
October 3, 2017
Buying Flood Vehicles
Buyer Beware – Buying Flood Vehicles from the Recent Hurricanes
October 4, 2017
Show all

How Should I Pay for a New Car?

With car sales hitting record highs, a common question I seem to keep answering is, “Justin, how should I pay for a new car?” While meeting with a client recently, he asked this very question. He actually had a few options he was looking at utilizing for the purchase and wanted my take on what I felt would work best. So with so many others asking as well, I decided to analyze each of the methods he considered. Perhaps a few of them are options you are exploring as well.

Financing

The first and most obvious option is financing. Whether it’s through a local bank or credit union, many people choose this route when purchasing a new car. Outside of when should you start investingpaying cash, this alternative would be my favorite. However, there are a few caveats to consider; interest rates being the most important. Typically when buying a car, interest rates are pretty low. Many times you can even get 0% interest loans from the dealers. So it makes sense to choose this option if it allows you maintain a cash position for other investments. For example, if the stock market dropped allowing you to buy in at a low position, you could use your cash to do so. Or maybe you find a business or a piece of real estate you wanted to invest in. Then financing allows you to keep from tying your cash up in a car. Therefore, using a simple low to no interest loan is never a bad idea; especially if you can, in fact, pay it off in cash at any time.

Capital Gains

Another option, selling stocks. With the markets running quite high, it could be wise decision to take some cash off the table for the purchase of a new car. No one knows what the market will do from one day to the next; so using the gains from market returns to buy a depreciating asset could work. The thought behind doing this is that if the market corrects before you withdraw your earnings, you lose that money. So in essence, capturing some of the gains he has returned and utilizing them in this purchase could really part of a rebalancing technique. The main concern with this particular recourse is taxes. You will have to pay taxes on the sale of your stock assets; therefore, if selling generates a significant amount of taxable income this may not be the wisest move. If the client is already in a high tax bracket, it most definitely would not be your most advantageous move. That’s one caveat to selling an equity position.

HELOC

Using a home equity line of credit was another technique he was considering employing. For a home equity line of credit, many CPAs will deduct the interest paid on these on a client’s tax return; thereby making this course of action possibly beneficial for some. The danger in doing this particular scenario is that you are using the equity from a secured to go in debt for an unsecured asset. Plainly put, you’re using the appreciation asset to obtain a depreciating asset. This most certainly would not be my first choice. Now having said that, I am CERTIFIED FINANCIAL PLANNER™ in Knoxville, TN and after I crunch the numbers, I find that there is a substantial tax benefit to do so, then, by all means, I’m suggesting to go for it. However, there are very few circumstances in which that will be true. Nevertheless, there may borrowing from your 401kbe a few high-income earners that could benefit from using a home equity line of credit for this type of purchase. So it is most certainly a possibility.

401k Loan

Next, some consider taking a borrowing money from their 401k. I’m not going to spend much time here. I’m going to be blunt. NO! NO! NO! NO! For this particular circumstance, I’m going to stand by what I have said in the past, do not borrow from your 401k it’s just not the best idea it rarely serves you to do so. Borrowing from your 401k to buy a car makes absolutely NO SENSE! Just NO!!

Cash

Now to the option, I am most likely going to endorse EVERY. SINGLE. TIME. Cash is king! I personally like the idea of budgeting my dollars to pay cash for a car at the appropriate time. Note I did NOT say pay cash for “new” car. That’s because I personally would never buy a new car. I just won’t do it. However, if I were going to do it, I would walk in and pay cash. Some will argue that in today’s car buying process that you can’t get as good of a deal. I’m just not convinced that’s correct though. You can negotiate better deals when shopping for a used car. Cash gives you more leverage in being a vehicle in the price range you want in my opinion.

So there you have it. Each of these strategies could be utilized advantageously. There are pros and cons for all of them. Honestly, there really isn’t a right or wrong answer. Everything depends on the overall financial position of the individual asking the question. As always, work with your financial planner analyzing which situation best fits your needs.

Comments are closed.