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Financing vs. Cash Buying for Vehicles
Posted on 3/26/14 at 2:38 pm
Posted on 3/26/14 at 2:38 pm
I'm going to be purchasing a used truck for about $17,000 fairly soon. I'll be trading in a more expensive vehicle and was planning on paying cash for the truck. I've been told by a few people that it's a bad idea to pay cash for a vehicle for tax reasons, but no one could really explain why. Is anyone familiar with this situation? TIA
6
Posted on 3/26/14 at 2:42 pm to Vanilla Coke
I'd like an explanation why I shouldn't finance at 2. whatever % and pay cash instead. Either way, you have a depreciating asset, so why outlay all that cash to buy straight up? Seems like you'd want to finance at the low percentage and keep your money working for you.
Curious minds want to know.
Curious minds want to know.
This post was edited on 3/26/14 at 2:43 pm
Posted on 3/26/14 at 3:02 pm to Vanilla Coke
The only tax advantage is by trading in your vehicle, you will not owe taxes on the trade-in value (ie. you will only owe sales tax on the difference in value). This should be regardless of your method of finance.
As for cash vs financing, I'm fully in support of financing at a lower interest than you can get through savings/investment. I've seen the "peace of mind" argument of having a fully paid for vehicle, however they act like the money you would have bought it with disappears. If you are disciplined, the idea is that you could pay it off at anytime, but instead choose to make a profit from your money. You also maintain a big more liquidity in your assets at a lower potential cost (interest rate), rather than tying them up into a vehicle.
As for cash vs financing, I'm fully in support of financing at a lower interest than you can get through savings/investment. I've seen the "peace of mind" argument of having a fully paid for vehicle, however they act like the money you would have bought it with disappears. If you are disciplined, the idea is that you could pay it off at anytime, but instead choose to make a profit from your money. You also maintain a big more liquidity in your assets at a lower potential cost (interest rate), rather than tying them up into a vehicle.
Posted on 3/26/14 at 4:15 pm to Vanilla Coke
I asked my personal finance professor (I am finishing my finance degree) how she could advocate for you to pay cash with rates so low. Peace of mind and lack of discipline were her answers. So basically if you are too stupid to invest the money you should go ahead and pay for the vehicle but if you can beat the rate with your return you should do that instead.
Posted on 3/26/14 at 4:24 pm to bobaftt1212
Got it. Thanks for the answers.
Posted on 3/26/14 at 5:43 pm to Vanilla Coke
pay cash period.
Posted on 3/26/14 at 6:12 pm to Vanilla Coke
quote:
I've been told by a few people that it's a bad idea to pay cash for a vehicle for tax reasons
How would your tax situation differ between paying cash or financing?
Secondly, with rates as low as they are, its not too bad to have your money working for you.
I mean, 15k over 5yrs at 1.99 will be like $800 in finance charges. That 15k over the same time period earning 6% interest in a fund would earn you $4500.
You'd make out ahead by $3700
Unless you just don't want to have a note or want to be able to save on insurance, since you won't have to have minimum coverages...
Posted on 3/26/14 at 7:28 pm to Teddy Ruxpin
So you would rather finance a depreciating asset?
Posted on 3/26/14 at 8:03 pm to tygerfan1
quote:
So you would rather finance a depreciating asset?
I don't understand this thinking... It's going to depreciate the same whether you pay cash or finance. If it's only going to cost you 1.99% to finance and you can turn around and make 6% off of that cash, you are helping negate the depreciation amount.
Posted on 3/26/14 at 8:08 pm to Lsut81
quote:
I don't understand this thinking... It's going to depreciate the same whether you pay cash or finance.
That's what I said in my post. I don't see the difference besides one let's you keep your money (and make money with it) and one blows it out the door.
This post was edited on 3/26/14 at 8:09 pm
Posted on 3/26/14 at 8:09 pm to Lsut81
I'd finance. At 1.99 you're money ahead. It is a depreciating assets, but in my case I can write off mileage or actual expenses, so it is even more of a no brainer. Even if I couldn't get the write off, i'd still finance. It's not like a car adds a whole lot to a personal balance sheet anyway.
Posted on 3/26/14 at 10:53 pm to Iowa Golfer
WWDRD?
Posted on 3/27/14 at 5:51 am to Lsut81
quote:
It's going to depreciate the same whether you pay cash or finance.
This is correct. If you can buy anything at all (car, house, whatever) at a rate that is less than inflation, then by all means do so. It saves money. The problem with car purchases is that new ones depreciate, but that has nothing to do with how you pay for it.
If you need "peace of mind" so badly that you must pay cash to keep your spending in line, then you are beta.
Posted on 3/27/14 at 6:49 am to foshizzle
quote:
The problem with car purchases is that new ones depreciate, but that has nothing to do with how you pay for it.
Yup, I will never buy a brand new car... I'm ok with buying a 2-3yr old, lightly used car. I just bought a "new" car and I did my research, checked out where the depreciation leveled off, and focused on that year range. Depending on the car, its usually in the 2-3yr mark.
Posted on 3/27/14 at 7:22 am to Vanilla Coke
The only tax it would affect is sales tax if you sold your vehicle outright and used that cash to pay for the new one. If you trade it in you don't pay sales tax on the trade value.
Posted on 3/27/14 at 10:01 am to yellowfin
I just want to know where I can get that 6% on a cash investment
Posted on 3/27/14 at 10:12 am to 756
quote:
I just want to know where I can get that 6% on a cash investment
¿Que?
This post was edited on 3/27/14 at 10:14 am
Posted on 3/27/14 at 12:51 pm to 756
quote:
I just want to know where I can get that 6% on a cash investment
Who said it had to be a cash investment.
I take the 15k, go buy admiral shares of a Vanguard fund which average around 8% over 5 and 10yr time frames and I let it sit.
Posted on 3/27/14 at 1:00 pm to Lsut81
Well if you are assuming to be able to pay it off in cash at anytime, then you would have it invested in a liquid investment.
If your money is sitting in an index, you could be up or down on the purchase price at any point in time over a 5 year window. Hence the "peace of mind" argument. You cant "know" you can pay it off at any time unless you are actually holding onto the cash, which isn't earning more than 2%
If your money is sitting in an index, you could be up or down on the purchase price at any point in time over a 5 year window. Hence the "peace of mind" argument. You cant "know" you can pay it off at any time unless you are actually holding onto the cash, which isn't earning more than 2%
Posted on 3/27/14 at 1:09 pm to foshizzle
quote:
If you need "peace of mind" so badly that you must pay cash to keep your spending in line, then you are beta.
I would say it is beta to sit there and think about how to possibly save 3-4k over 5 years on a vehicle purchase. The alpha dog would just go throw stacks on the table and walk out with the keys and not think about it again.
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