Gekko

What is the smartest financial thing to do and why?

Robbo

Too many individual variables to give a pat answer.

For me, I decided to pay the dealer cash, which I financed from my home equity line. I pay 4.75% on my line which is tax deductable.

Now if I had only sold all my stocks a month ago to pay for the car.............

Gekko

I'd love to go back to March 2000!!!

tfischer

Robbo is right: the correct answer depends upon your particular circumstances. All things being equal, and absent considerations of cash availability, paying cash is almost always the best way to go in the long run. After all, that's what the lessor is doing, and he's making a living at it.

Personal financial circumstances and other factors, such as a short period of expected ownership, might make one of the other options better, but it's often best to be your own banker if you can.

As for me, I sold my SC400 to my brother and ponied up the diff to the dealer. The relatively small cash outlay traded me up to a really great car.

It's not for sale, either.

RodF

The longer you intend to own the car, the more it favors buying vs. leasing. Factors which favor leasing would be if there is a large percentage of business use and the car cost is above the luxury auto limits, if you are the type that gets a new business car every few years, or if you don't have sufficient current cash flow to purchase the car that you want.

Outside of income tax or cash flow considerations, it would almost always be financially cheaper to buy rather than lease. After all, the leasing company is an additional middle man that has to make money somehow.

As for the issue as to whether it is better to pay cash vs. finance (assuming that is an option), you need only ask yourself as to whether you could get a better return on an investment than the interest rate over the life of the car loan with the cash you would have used to buy the car. If you feel you can get a better return, you should borrow to buy the car and invest your cash. If you don't, you should "invest" your cash in the car and save yourself some interest cost.

Jayson

My wife and I have about $22,000 worth of equity in our home. Can you elaborate on what you did to buy your car? This interests me and I'm not about to call one of those lenders, yet.

Thanks.

tfischer

Jason:

The only interest payment these days that is tax deductible is a loan secured with a mortgage on real estate. If you have equity in your home above your current mortgage balance, you can probably borrow about 90% of that amount and secure the loan with a second mortgage. Often this is done without any immediate use for the funds, but instead the loan is set up and you are given an amount that you can borrow by writing checks on a specific account. This is called a line of credit.

The interest is deductible, but if you default, you have put your home up as the collatteral. For cars, this is not too bad, because there is always some value in the car, although you could be in a position where the car is worth less than the borrowed amount. Home equity loans, and especially lines of credit, are dangerous because a failure to be able to meet the payments can mean foreclosure. For this reason, their use for purposes such as vacations, furniture, even home repairs, is usually discouraged.

Frankly, with a car that costs as much as this one, you don't want to wind up after the purchase with big payments you can't meet or nothing in the bank to fall back on.

I would think.

Jayson

That makes sense. Thank you for your input. If I were ever in a position to lose something. I'd rather have my car repo'd rather than my house foreclosed on. I think I'll just stick with the traditional auto loan at the 2% points higher.

rcgiles

I agree. Cash if you plan to keep it, and I've been very pleased except for the "run flats."

helper

Finance rates are around 4% these days. If you can get more than 4% on your investments(not easy in todays world), finance the the car. If your return is less than the interest is, and you can afford it, by all means pay cash.

I think I stated that properly.

vx430

In my opinion, you can only benefit from a lease if you are leasing a company car. Many years before, a friend of mine leased a SL 500, kept it for 5 years and must have paid in the ball park of 90k. At the end of the 5 years, the dealer told her that the residual on the car is about 50k. If that 90k went into financing the SL, she would probably own it by now and still retain a sizable trade in value because the residual dollar amount is now way higher than what the car is worth. So leasing is only beneficial to a business having all of the payments tax deductible, otherwise, to the rest of us, it is like having a really pricey rental car.

Another friend of mine tried really hard to get a zero down financing deal which he got. Problem is that he has a rather short interest span on cars. So after 2 years when he decided to trade in the car for something else and got into a negative equity situation or what the dealer called an upside down. This is because as his car left the dealership, the value of the car as we all know depreciates significantly and the rate he makes payments is much slower than the depreciation rate. Plus living in a large state like California, you rack up more miles than the norm. So he had to make a huge payoff to get the new car that he wanted.

I agree with the members above that the best way is cash or if financing is a must, use a home equity loan so at least the interest is tax deductible. And if you don’t have a home yet, at least put a large down payment, preferably somewhere around 50% so you don’t run into the negative equity situation.

Luckily enough for me, my 2 yr old SLK 320 held a pretty good trade in value at about 30k while I was purchasing the SC 430. And hopefully, the SC will be able to retain a high value if I decide to trade it in for something else a few years down the line.