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Paying for a new car
Old 06-18-2018, 11:32 AM   #1
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Paying for a new car

We are giving our daughter our 7 year old hatchback, so we will be in the market for a replacement. Looking at 2017 (used) or 2018 (new) vehicles and will probably spend near $20k.

My question is where to get the money, so that it won't add to our taxable income. I am over 59.5 years old and we've been retired for 3 years now.

1. Distribution from a contributory Roth IRA where we have cash from a previous sale that hasn't been reinvested yet. We have been doing small Roth conversions (into separate accounts) over the past 5 years, so this seems like a step backwards.

2. Sell something from our after tax account, mostly dividend stocks, preferreds, and REITS. Some appreciation would be income but 70-90% would be cost basis. This would reduce our annual dividend income that we currently spend.

3. Use dealer financing at 2.9% / 5 years (or forego a $1500 rebate to get 0% on the new car option). Pay larger monthly payments as budget allows while hoping for no other major expenses to avoid doing 1. or 2. above and have the car paid in 2-3 years. This would crimp our budget a bit, and I hate debt.

All these options have pluses and minuses. I seem to go back and forth on which is better. Any suggestions or better ideas?
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Old 06-18-2018, 11:46 AM   #2
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Why take a lump sum out of the market if you can get 0% financing?

We bought a new car in March and took advantage of zero down and 0% 5yr financing. This added <$500 per month to our monthly expenses, easily within monthly cushion...easy, no need to move money around.

It almost didnít seem right that we walked out of the dealership without having paid a cent. And the first payment wasnít due for 45 days!
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Old 06-18-2018, 11:48 AM   #3
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It somewhat depends on your longer term financial situation. If you think you will eventually have a big nest egg to pass on I would let the Roth run, tax free, no RMD requirement and it can be eventually taken over the life time of the recipient.

Option 3 isn't a bad rate (given 5 years), but you might be able to do better (my local CU is offering 2.59% on a 5-year loan). Even better, lessen the term (e.g. my local CU has 2.24% for 3-year money).

I would tend to go for option 2. RANK your portfolio, with the following evaulation: Would I buy it at the current price? If so, keep it (assuming it doesn't represent too much single stock risk, e.g. over 5% of your net worth). If not, consider selling it, especially if your profit on it is minimal (or you have a loss on it). I would also tend to prune holdings that are not qualified (e.g. many REITS).

This is all FWIW and based on my financial condition. Not knowing yours, it is just a guess.
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Old 06-18-2018, 11:48 AM   #4
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Why take a lump sum out of the market if you can get 0% financing?
Because he has to give up a $1,500 rebate, meaning the 0% financing is really a $1,500 finance charge.
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Old 06-18-2018, 11:59 AM   #5
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According to an on-line calculator $20k for 5 years at 2.9% is $358 per month. Our current spending is about $4k / month, so this would be about 9% of our budget (or require a 10% budget increase). I'd like to think we could tighten up a little bit but don't want to scrimp - who knows what else could happen?

According to the dealership, the total cost of 2.9% loan with rebate paid over the full 5 years is very close to the 0% no-rebate total amount paid.

Edit to add: $358 x 60 = $21480 or $1480 finance charge, compared to a $1500 rebate. If we could pay ahead the 2.9% gets a bigger savings.
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Old 06-18-2018, 12:07 PM   #6
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According to the dealership, the total cost of 2.9% loan with rebate paid over the full 5 years is very close to the 0% no-rebate total amount paid.
Yep.
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Old 06-18-2018, 12:16 PM   #7
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Yes, REWahoo, your calculation is accurate - I rounded the numbers.

It could be that my fear of debt is overblown, or I may be squeezing pennies out of nickels. It's been quite a while since we bought a big-ticket item like this, the first time since not having a paycheck.
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Old 06-18-2018, 12:19 PM   #8
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Or if you are negotiating on a 2017, negotiate on the price. Depending on the model and how well it has been selling, you can probably negotiate away an additional $1500. Cargurus is your friend in this area.



I just hate car payments and although you lose the opportunity to earn on the $20K, your hassle factor with monthly payments needs to be considered.


I just bought a 2017 Sonata Hybrid and was able to negotiate a $1500 discount off the 'best internet price.' Helpful was that it was an all cash deal. CarGurus will show you how long the car has been on the market and the pricing changes over time. That gets you past the big noise on $9K off MSRP (when they were never going to sell it at MSRP).


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Old 06-18-2018, 12:21 PM   #9
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It could be that my fear of debt is overblown, or I may be squeezing pennies out of nickels. It's been quite a while since we bought a big-ticket item like this, the first time since not having a paycheck.
I understand your aversion to debt - I'm cut from the same cloth.

From my point of view the cost of each of your options is roughly the same. If it were me I would do whatever I thought would allow me to sleep best at night.
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Old 06-18-2018, 12:30 PM   #10
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1 is a step backwards. 2 isn't a horrible option... nor is 3.

It really isn't a huge decision... even if went with door #3 and your equity portfolio were to earn 5.8% you would only be ahead by $1,500. You can pretty much flip a coin.

FWIW, I bought a car at 1.9% a couple years ago... at 1.9%, I thought financing was the better play. I'm not sure what I would have done if it was 2.9%. I later bought another vehicle at 5% financing for the financing bonus and then paid it off a couple months later (dealer asked me to wait a couple months to preserve his relationship with the lender or possibly avoid a clawback and I conceded to it).
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Old 06-18-2018, 12:31 PM   #11
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.... I just hate car payments and although you lose the opportunity to earn on the $20K, your hassle factor with monthly payments needs to be considered. ...
No hassle factor at all... I set up automatic recurring payments pushed from my bank to the lender when I first got the loan and haven't given it a second thought since.
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Old 06-18-2018, 12:40 PM   #12
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According to an on-line calculator $20k for 5 years at 2.9% is $358 per month. Our current spending is about $4k / month, so this would be about 9% of our budget (or require a 10% budget increase). I'd like to think we could tighten up a little bit but don't want to scrimp - who knows what else could happen?
....
I don't think this is a helpful way to think about your finances.

It sounds like you don't want a car payment because it would increase your monthly expenses. But it looks like you are ignoring the fact that the alternative is that your portfolio is $20,000 lower - as if that didn't exist? You are going to take the $20,000 out of your portfolio, so take the monthly/annual amount out of your portfolio too. It's all the same thing, if the $20,000 withdraw didn't cause you to 'scrimp', then how is ~ 1/5th of that a year, or 1/60th per month going to make you scrimp? It makes no sense when you stop compartmentalizing funds.

As I said a few days ago, I don't think it helps to look at expenses like this in isolation. You will likely have several large expenditures over the next few decades (appliances, HVAC, new roof, remodel, etc). So just look at long term averages. You probably expect your long term (not 5 year) portfolio growth to be 2.9% or better. So that says taking a low rate loan on a string of purchases like this make long-term sense.

The delta is probably not so great to be a major factor though. I might take a closer look at tax implications. Will taking out $20,000 now create a bigger tax bill than taking out $21,500 over 5 years. The two combined might push it towards taking either loan, but I don't think it is life changing.

Personally, I think you should take the loan. My reasoning is, you should get over any 'aversion to debt', and recognize it for what it is - a tool, that can be used wisely or poorly. Learn to use it wisely, you will be better off in the long run.

edit/add: " Our current spending is about $4k / month, so this would be about 9% of our budget (or require a 10% budget increase)."

Or another way to say that - "if we pay cash, it will require a 600% increase in our monthly budget!" (for one month)

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Old 06-18-2018, 01:09 PM   #13
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Is your taxable income question about ACA subsidy?

If not I'd probably take from the after tax account and be done with it. Your taxes will likely rise after SS and MDR ...I think 1500 is a pretty big negative on the zero interest...2.9 isn't bad but I'd still just pay for it now unless ACA is an issue.
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Old 06-18-2018, 01:10 PM   #14
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When buying a car, cash is king. The 0% financing deals are just a scam to sell you a car at higher prices. You can get much better deals if you research what others are paying for all cash deals and pre-negotiate a price with the dealers internet sales person. It costs dealers money to carry inventory and they have monthly sales objectives to meet. Granted they don't like all cash buyers, but they sometimes need them to meet their objectives.
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Old 06-18-2018, 01:44 PM   #15
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When buying a car, cash is king. The 0% financing deals are just a scam to sell you a car at higher prices. You can get much better deals if you research what others are paying for all cash deals and pre-negotiate a price with the dealers internet sales person. It costs dealers money to carry inventory and they have monthly sales objectives to meet. Granted they don't like all cash buyers, but they sometimes need them to meet their objectives.
I did both. I negotiated an all cash, out the door deal that was a good deal based on competitive quotes from other dealers for the same, exact car (I was ordering a car).

After we had agree to numbers I became aware that the manufacturer was offering 1.9% financing so I ended up financing at 1.9% but with the same out-the-door price as cash.
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Old 06-18-2018, 02:52 PM   #16
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When buying a car, cash is king. ... .
Can you back that up? The first few search hits said th oposite - this was typical:

https://help.edmunds.com/hc/en-us/ar...ash-for-a-car-

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These days, customers paying cash for new cars are no more attractive to car dealers than are those who wish to finance the purchase. In fact, the opposite is more likely to be true.

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Old 06-18-2018, 02:57 PM   #17
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According to an on-line calculator $20k for 5 years at 2.9% is $358 per month. Our current spending is about $4k / month, so this would be about 9% of our budget (or require a 10% budget increase). I'd like to think we could tighten up a little bit but don't want to scrimp - who knows what else could happen?

According to the dealership, the total cost of 2.9% loan with rebate paid over the full 5 years is very close to the 0% no-rebate total amount paid.

Edit to add: $358 x 60 = $21480 or $1480 finance charge, compared to a $1500 rebate. If we could pay ahead the 2.9% gets a bigger savings.
No.
with debt the cost is: $21,480
pay cash cost is: $20,000 - $1,500 rebate = $18,500 total cost
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Old 06-18-2018, 02:58 PM   #18
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When buying a car, cash is king. ....
Quote:
Originally Posted by ERD50 View Post
Can you back that up? The first few search hits said th oposite - this was typical:

https://help.edmunds.com/hc/en-us/ar...ash-for-a-car-




-ERD50
Dash-nab-it ERD50, why confuse the whole situation with facts?
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Old 06-18-2018, 03:14 PM   #19
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They make money off the financing. I’d do the loan. While it’s true that anything can happen, the market is good and the economy is good so why take money from the portfolio? Personally, unless I was planning on paying off the loan right away, I’d go with the zero percent financing. Still, get your best deal and come out ahead. At least as ahead as possible.
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Old 06-18-2018, 03:18 PM   #20
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No.
with debt the cost is: $21,480
pay cash cost is: $20,000 - $1,500 rebate = $18,500 total cost
In this case cash is clearly king.....or the 2.9 with some extra front loaded payments to recoup some of the 1500 dollars in interest that will accrue over the life of the loan.

Our last new car was in 2013..we made a great deal with the dealer contingent on cash and believe me it was a good deal. Nissan gave 750 bucks to finance and we made one payment and then paid the balance...I don't remember the interest rate but this was in the time of dirt cheap interest rates.
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