advice on car purchase vs car loan

[joesxm3]

I am almost ready to get a new car to replace my 18 year old one. I think I am going to "blow that dough" and get a Tesla Model 3.

I have a choice between paying cash or having a six year 2.5% loan.

I could also lease it for 3 years at an effective 4.6% or so rate. The argument for lease might be that the technology is improving so I could replace it with a better one in three years. There is also the expected battery pack life span. The downside is it would be paying more.

With inflation the way it is, the argument for the loan is that I would pay with debased currency and could invest the money while I pay the loan.

I have not bought anything on credit other than my one credit card and am FIRED, so based on some other threads, I may have issues getting approved for the loan.

The other factor is that I have too high a cash allocation in my portfolio, so even if I were to invest the amount of the car loan, I would still probably have an equivalent amount sitting there earning 0%.

Part of me says that I may as well just pay for the car and effectively lower my cash allocation in the portfolio.

The other part leans towards planning to replace the car with a more advanced model in a few years, so maybe the lease might make sense. However, the mileage limit and the worry of being nickel and dimed for every little scratch worries me.

Does my logic that the idea of taking the loan and investing the money only makes sense if you are one of those who are fully invested seem correct?

Thanks.

Joe

 

[OldShooter]

As a matter of policy I will not borrow money to buy a car. Further, I consider a lease to be a complicated and expensive way to borrow money. Hence, policy overrides any kind of interest rate arbitrage ideas that may come to mind.

Also I avoid buying cars that do not have at least a year of depreciation on them. Eating that first year of depreciation swamps any possible arbitrage profits anyway.

Probably this approach precludes my buying a Tesla or any other high-demand car where year-old may not be available or may not save much money. YMMV, particularly if you view it as a BTD decision, not a financial one.

 

[38Chevy454]

Couple things I take from your post:
1. You tend to keep your cars longer time
2. You are risk averse (evidence by your high cash allocation) and would probably invest the car money fairly conservatively anyway.

Given those, just pay cash and be happy with your new car. Sure you could invest and likely be ahead some amount in investment returns vs the 2.5% loan rate. But in the end, 6 years is not really that long of time and the difference may not be worth the stress to you.

 

[brett]

I would typically pay cash or finance. The finance vs cash would depend on the after tax number comparing the cost of a loan to the investment income or gain that would otherwise be enjoyed.


But...given that newer technology is always coming along, especially battery technology, I might be temped to lease depending on the premium.

You could be in a position at the end of the lease where the buy out exceeds the street price because of technology improvements on new models.

 

[SnowballCamper]

I generally buy cars new, and keep them a long time. I'd skip the lease. There are older Teslas that have free charging. Apparently its a feature no longer offered but goes with the vehicle unless/until it is sold back to Tesla...something to check into.

No sense in taking a loan if you are sitting on a pile of cash...it's just giving money to the lender.

 

[joesxm3]

I typically have kept my cars at least 10 years and this 2004 Acura for 18 years, but I think I might not keep the Tesla that long since the technology is likely to improve. Plus, from what I have read, the battery pack life is only 8 or 10 years and then around $16,000 to replace.

The comments about just pay cash and avoid the hassles make sense. Probably the easiest way to go.

Leasing would seem a safe bet since I would not have to worry about trying to sell the car after the three years. Tesla does not allow buying the leased car. Rumor is that they are going to use them for robot taxi cabs. I guess approving for leasing is the same hassle as approving for a loan. It might be a moot point if my lack of debt disqualifies me from borrowing.

So, I guess it is moving towards cash versus lease.

I don't have to make up my mind when I put the order in. In fact, the $250 deposit is like buying a call option on the Tesla. I could always change my mind before delivery, which would likely be in December for my model.

One unknown is if there will be a federal electric vehicle incentive for Tesla in time for my purchase. I can always cancel and reorder if that becomes an issue.

An interesting option that I did not realize is that I can rent the full self driving option for $200 a month and turn it on and off at will. I will definitely try it for one month to see what the big deal is.

However, my frugal stomach turns when I think of the additional cost of car insurance and property tax compared to my 18 year old car.

 

[Aerides]

What is the 2nd hand Tesla market normally like? If it's usually hot, and I think it is, then buying and selling in a few years to upgrade probably puts the leasing option aside. If tempted by new/better/shinier, there's a good chance someone will pay to take your car off your hands better than the lease option.

For 2.5% I'd probably pay cash, assuming you don't have to sell good stuff to do so. If you do finance, make sure you have a no-early penalty, and just pay it off in 2 years vs. 6.

 

[MC Rider]

What is the 2nd hand Tesla market normally like?............

Vehicle markets are not normal now.
Well, maybe I just hope this is not the new normal.

 

[Qs Laptop]

How many miles per year do you drive?

 

[joesxm3]

I saw a few used Tesla's on the Internet and the price seemed almost as much as a new one.

I thought I would drive less after FIRE, but I went from 200,000 to 223,000 in what seems to be two years or less. I think I must drive almost 10,000 a year, but I am hard pressed to figure how I do it.

I do drive back and forth to take care of my stepfather and that takes 75 minutes one way and I do it maybe as much as five or six times a month.

I suppose that would impact the lease mileage limit, which is one thing that worries me.

At this point I am leaning towards just paying cash and hoping that if I decide to replace it I can sell the used one. I guess it would really have to be something extraordinary to make me want to dump the car after three years - maybe a flying Tesla.

 

[OldShooter]

... At this point I am leaning towards just paying cash and hoping that if I decide to replace it I can sell the used one. ...

Simplicity is almost always an excellent choice.

 

[joesxm3]

I just saw a 2021 Tesla Model 3 with 4000 miles for sale at the local gas car dealer and the price was $8000 more than buying a new one from Tesla.

 

[Koolau]

The "conventional wisdom" is not to borrow for a depreciating asset. However, at 2.5% you stand a good chance of coming out ahead because of repaying in inflated dollars (and investing the money in the mean time.) YMMV

 

[DrRoy]

As a matter of policy I will not borrow money to buy a car. Further, I consider a lease to be a complicated and expensive way to borrow money. Hence, policy overrides any kind of interest rate arbitrage ideas that may come to mind.

+1. Only exception is that I have taken a couple 0% loans in the past.

 

[HarveyS]

Buy the car with cash.
Why do I say this?
1. If you take a loan you most likely won't invest the cash you have. If you would invest it, it would already be invested.
2. You have demonstrated you are OK driving a car with outdated technology by holding your old car so long. (By the way, so am I). Why are you now worried about technology changing rapidly in the next few years?

I would consider taking the loan if there was incentive to do so (like $1000 or so) as long as there was no prepayment penalty. Then I'd pay off the loan all at once.

 

[joesxm3]

Two reasons why I am worried about technology changing.

First, I read that the batteries degrade over time so an electric car may only go 8 or 10 years on the first battery pack. It said that this may decrease the used car resale value.

Second, Tesla is working on a new battery technology. It is not clear when it will be produced at scale and it may go into the cyber truck and semi first. So may not get to the sedans until 2023 or 2024. It is said to be six times as efficient and cheaper to produce. I worry that would mean that the new Tesla when I would sell mine would be better and cheaper than my old Tesla.

However, reading about car leasing said that the lease contracts have lots of details that are confusing like "residual value" which it said is an amount you have to pay the difference on if the value of the car drops before the end of the lease. The estimate they gave me has this item, so I suspect I would have to study the actual contact.

I hate dealing with car dealers, so the simpler the better is to my taste. Ever since my second car I have always paid cash and probably will end up this time as well.

The theory on the loan would be that I borrow the money and put the equivalent into Tesla stock so I get the car free. However, with the stock at ATH that probably will not work the way it would have two years ago. However, I just saw a video that said that the electric car credit is likely to not be retroactive and likely to start on 1/1/2022. That would kill sales volume for the third quarter and possibly drive down the stock price.

 

[ShokWaveRider]

However, reading about car leasing said that the lease contracts have lots of details that are confusing like "residual value" which it said is an amount you have to pay the difference on if the value of the car drops before the end of the lease. The estimate they gave me has this item, so I suspect I would have to study the actual contact.

Leasing is not really confusing at all. Not more than any other contract. Residual Value is what the car would be worth at the end of the lease. I.E. what you could buy it for at the end of the lease period if you wanted, but you do not need to. I have a spreadsheet I created to help.

If you are like me and do not want to buy the car at the end of the lease unless it can get a better price if I sold it myself, one wants it to be as high as possible. Why, it reduces the monthly costs of the lease.

In a Nutshell
"The residual value of a leased car is what the leasing company expects the car to be worth at the end of the lease. This figure, which is usually provided in your lease agreement, is important for two reasons: It’s part of how your monthly lease payments are calculated, and it’s what the car will cost if you have the option to buy it when the lease ends."

 

[DayDreaming]

What is the 2nd hand Tesla market normally like? If it's usually hot, and I think it is, then buying and selling in a few years to upgrade probably puts the leasing option aside...

I recently ordered a Tesla Model Y so I've been following all things Tesla pretty closely. Many people are selling their Teslas for more than they bought it for. First, Tesla has slowly been raising their prices on all cars. Second, these cars are in demand, and some people are willing to pay a little more to get theirs quickly, particularly for the Model Y which has a pretty long wait. Say someone bought a Model 3 18 months ago, and the price of a new Model 3 has increased $4000 in that time. This person could easily sell that car now for $5-6000 more than their original purchase price. Of course this trend can't last forever.

 

[DayDreaming]

Two reasons why I am worried about technology changing.

First, I read that the batteries degrade over time so an electric car may only go 8 or 10 years on the first battery pack. It said that this may decrease the used car resale value.

Second, Tesla is working on a new battery technology. It is not clear when it will be produced at scale and it may go into the cyber truck and semi first. So may not get to the sedans until 2023 or 2024. It is said to be six times as efficient and cheaper to produce. I worry that would mean that the new Tesla when I would sell mine would be better and cheaper than my old Tesla

There is a lot of speculation about how Tesla will use these new batteries in their existing models. Most think that Tesla will not just do a 1 to 1 swap of old & new batteries and say "here's a car that gets more range, with no price change". More likely, they will put less of these new batteries into the Model 3, so that it still has the same range, for the same price. To the buyer, it's effectively the same car, but it would weigh a bit less and probably would charge a bit faster. Tesla might then use the new batteries to make an extra-long-range version of the Model 3 for a higher price.

I hate dealing with car dealers, so the simpler the better is to my taste. Ever since my second car I have always paid cash and probably will end up this time as well.

Having just ordered a Tesla myself, the ordering process could not be any easier. You order directly from their website, from the comfort of your own home. No dealer is involved at all.

 

[The Cosmic Avenger]

I assume the reason used Teslas are selling for more than new is simply due to the wait time for new orders. People are paying the convenience premium to get one NOW.

 

[pb4uski]

As a matter of policy I will not borrow money to buy a car. ...

So if you were buying a car and the manufactuer was offering a 60-month, 0% loan and whether or not you took the loan had absolutely no impact on the total out-the-door purchase price then you would NOT take the loan?

 

[OldShooter]

So if you were buying a car and the manufactuer was offering a 60-month, 0% loan and whether or not you took the loan had absolutely no impact on the total out-the-door purchase price then you would NOT take the loan?

Probably not an option. I think those deals are typically offered on current model cars that the market doesn't like for some reason. The part that you clipped out of my post says that we don't buy current model year cars. The few pennies that might be made from interest rate arbitrage would be swamped by the thousands of dollars hit from first year depreciation.

If your hypothetical loan were an option, though, it is probably 50/50 at best whether I would screw around with it for a probably-small arbitrage profit.

I did take a car loan once, on the Mazda RX-8 I bought a decade or so ago. Mazda Finance offered a $2500 cash credit if I financed my new-last-year leftover car with them So I took the money, paid it off as soon as the title cleared the state and netted about $2100.

And, really, the no-loans policy was more important much earlier in our financial lives, where it kept us from buying cars we could not afford. That was tremendously beneficial to our net worth trajectory. I borrowed once; to buy a used Porsche when I got out of graduate school. God, I hated that loan and vowed "Never again." Until the RX-8, never did.

 

[joesxm3]

Having just ordered a Tesla myself, the ordering process could not be any easier. You order directly from their website, from the comfort of your own home. No dealer is involved at all.

True, no dealer involved with putting the order in, but still a lot of headaches (maybe self induced).

I plan to buy the Model 3 Long Range. The estimated delivery is December 2021. The latest I have seen on the possible EV incentive credits is that the Senate version will be $10,000 for a Tesla and retroactive. The House version would be $8000 for a Tesla but would only apply if delivery is after January 1, 2022. The rumor is that the House version will be the compromise.

So, it looks like most people will be trying to delay their delivery into 2022 and my guess is that anyone that does not put their order on hold will be bumped to the head of the line and get delivery in 2021.

From various forum discussions, it seems that you get put to the back of the line if you put your order on hold then release it. I would imagine waiting until January or the last week of December would put my order into a huge stampede. The only hopeful fact is that the Standard Range Plus seems to be much more in demand.

I would not be surprised if your Model Y order delivery is sped up quite a bit depending on how the law is written. Also, it said that there is a price cap for the incentive and the Model Y would only get the credit if it is classified as an SUV.

It would work out much better if Congress would just make the incentive effective as of the signing of the bill.

So, while I don't have to deal with a sleazy car salesman, I still manage to find enough to worry about.

If I was not worried about something expensive going wrong with my 2004 Acura TSX, I would probably just wait until next summer when things are more back to normal.

 

[joesxm3]

I borrowed once; to buy a used Porsche when I got out of graduate school. God, I hated that loan and vowed "Never again." Until the RX-8, never did.

I was flat broke when I bought my first new car, a 1981 Diesel VW Rabbit. I had just made the leap from working in the VW Auto Parts Department to an entry level computer programming job (after paying the rip off trade school $6000). I even had to talk the general manager into loaning me the down payment for two weeks.

I buckled down and paid off that loan as fast as I could. The two cars since then were cash.

 

[joesxm3]

There is a lot of speculation about how Tesla will use these new batteries in their existing models. Most think that Tesla will not just do a 1 to 1 swap of old & new batteries and say "here's a car that gets more range, with no price change". More likely, they will put less of these new batteries into the Model 3, so that it still has the same range, for the same price. To the buyer, it's effectively the same car, but it would weigh a bit less and probably would charge a bit faster. Tesla might then use the new batteries to make an extra-long-range version of the Model 3 for a higher price.

I watched a couple You Tube videos on batteries and am a bit more comfortable with the idea that the batteries will not crap out after a couple years.

The Tesla warrantee is 120,000 miles or 8 years. So I guess that should be my projected life span of the car.

One video referenced a study that said that Tesla Model S batteries after 8 years still retained 90% capacity. Those would have been older battery technology.

So I guess I will probably just pay cash, since I doubt that even if the market crashes I won't be jumping in so heavy that the $50K or $60K will make me run out of liquidity.