Financing a Car When Retired

[ulvazell]

Saw a thread on renting an apartment once retired, and it made me think of buying a car...

Just to throw out some round figures, if currently I'm making 10% in the market and yet I can finance a car for 1.9% it makes no sense to me to pay cash for a car. That said however, as with the renting an apartment example, if I am FI and can very, very easily make a car payment, how does that work if I don't have a job?

BTW, also new to the forum. I have been hanging around reading posts and they have prompted a lot of questions which have helped me refine my FIRE date. Thanks for all of the great advice and discussions...

 

[Corporateburnout]

The Withdrawals from your investment income along with SS and/or pension income should qualify you for a car loan.

I just leased a vehicle and my withdrawals were the only income I reported on the application. Your FICO score is a big factor in the decision.

Keep in mind that car loans are easier to qualify for because they can repossess the car in case of default.

 

[Sojourner]

I just went through this myself, so I'll offer my take on it. You should only finance the car purchase at 1.9% if you don't have a comfortable cash cushion to pay for it outright. In other words, don't sell a bunch of equities to raise cash to buy a car.

In my case, though, I decided to pay for the car primarily in cash because I have well over $50K in short term cash reserves earning only 1%, so I figured it would be better to use a portion of that cash to avoid the 2% finance charges than to let it continue to sit in a bank account not doing much of anything.

If you do decide to finance, it shouldn't be a problem that you're not employed. All they did for me was run a credit check. Never asked about my employment or wanted to see any recent pay-stubs or any other details like that.

 

[OldShooter]

Well, remember that the "10%" is far from certain for the duration of the car loan, and it is taxable eventually if not now.

Predictions are difficult, especially about the future, but there are those who say we are long overdue for a major correction.

If it were me, I'd try to negotiate a little better car price instead of a low-rate loan, then I'd pay cash. Playing the carry trade game is not my thing. YMMV of course.

 

[ShokWaveRider]

We have leased a car ever since we have been retired. Works out well.

 

[RE2Boys]

I've always gotten better deals on cash purchase than mixing finances into the equation. Bought three cars (all used of course) in 2016, all were cash deals. Haven't financed a car since 1985 Dodge.
I'm with OldShooter!

 

[OldShooter]

... Bought three cars (all used of course) in 2016 ...

Of course. Why eat all that early depreciation? I'm presently in the market, looking at a 2015 Infiniti Q60 with about 13K miles. The price is at least $25K less than what the new car buyer paid!

... all were cash deals. Haven't financed a car since 1985 Dodge. ...

Yup. Right out of graduate school I borrowed to buy a used Porsche 911. Gawd, I hated that loan! Since then I have only bought cars that I can pay for.

Re leasing, IMO that is simply an opaque and complicated way to borrow money. There is a reason that the salespeople usually get extra commission when someone snaps on one.

 

[Texas Proud]

One of the problems with paying cash is that on some deals you actually get a better price IF you finance... the last two cars I have purchased I have saved $2,000 total financing...

Both were also very low interest so I paid monthly... I do not want to get rid of my cash cushion (which is not big anyhow) as it would require me to sell and recognize gains... I am still playing the ACA credit and any income is taxed...

 

[ulvazell]

Of course. Why eat all that early depreciation? I'm presently in the market, looking at a 2015 Infiniti Q60 with about 13K miles. The price is at least $25K less than what the new car buyer paid!

I don't remember the last time I bought a new car. We always buy low mileage used with some remaining factory warranty. Let someone else take the depreciation hit...

 

[Fedup]

I a keeper type of person. So I buy new car and keep them forever. Same with houses as well as husband, but only one so far.

 

[ShokWaveRider]

I prefer leasing for a few reasons. It does not work for all people. Maybe my outlook will change as I get older. Here is my Reasoning. Actually No 6 is by far the most important.

1) I get a new car maintenance free for 2 or 3 years (That is my preferred period)
2) I get to try out different new cars, (Mercedes, BMW, Audi, Jaguar, etc.) without a life long commitment.
3) I like cars that appear to end up in $50 - $60k range. Nothing magic about this, it is not a budget thing. It is just the cars I want to try are in that range, pure coincidence.
4) I keep 60 - 65% of the cars value in MY Credit Union. (A lot less though for most US made cars)
5) More often than not the car loses more money than I do in a 3 year period. If it does not, I sell it before the lease ends (a couple of months early) and pocket the profit.
6) THE BIG ONE... No the VERY BIG ONE. If the car gets hit by anyone or I damage it to the level where a Carfax or Auto Check record is initiated. I LOOSE NOTHING and gain everything. I just give the car back at the end of the lease.

Remember for the most part you cannot (Repeat Cannot) sell a used car with a bad Carfax or auto Check for any where near what it is worth regardless of the severity of the accident or the level of which it is repaired. at least not to anyone who is smart (Assuming all of us are). The FIRST thing you do is "Get the CARFAX". And run if it has a record.

Now if you keep cars to year dot, then this may not bother you, and yes it pays to buy if you keep a car for a long time.

 

[OldShooter]

One of the problems with paying cash is that on some deals you actually get a better price IF you finance... the last two cars I have purchased I have saved $2,000 total financing ...

Yup. But you don't have to keep the loan, just sign up for it. (Unless there is a prepayment penalty, which is prohibited in my state.)

My current toy car, a Mazda RX8, had a deal where if you financed with Mazda they cut the car price by $2500. So I signed the deal, waited for the title paperwork to be processed by the state ( a couple of months), then paid off the loan. So I paid two or three hundred bucks in interest to get $2500.

(The car was "new" because it was never-sold dealer stock but it was a model year old and, net, I paid roughly 2/3 of the new sticker price. I'll do deals like that all day.)

 

[OldShooter]

...
6) THE BIG ONE... No the VERY BIG ONE. If the car gets hit by anyone or I damage it to the level where a Carfax or Auto Check record is initiated. I LOOSE NOTHING and gain everything. I just give the car back at the end of the lease. ...

Well, yes, but you are not eliminating that risk. You are simply paying someone else to assume it for you. Exactly like buying insurance, but the premium is buried in the lease.

Out of curiosity, how many times have you had significant damage and thus benefited from paying someone else to take that risk? And do you have any idea how much you're paying for the insurance?

 

[foxfirev5]

I a keeper type of person. So I buy new car and keep them forever. Same with houses as well as husband, but only one so far.

Insert wife in place of husband and I'm on the same page. Probably the biggest reason I'm ER'd.

 

[Corporateburnout]

One of the problems with paying cash is that on some deals you actually get a better price IF you finance... the last two cars I have purchased I have saved $2,000 total financing...

+1.

Before I decided to lease I was negotiating a purchase deal and was offered $1000 credit for financing. You can prepay the loan after only 3 months. So I would have paid the finance charge for 3 months @2.9% and saved the balance.

 

[ShokWaveRider]

Well, yes, but you are not eliminating that risk. You are simply paying someone else to assume it for you. Exactly like buying insurance, but the premium is buried in the lease.

Out of curiosity, how many times have you had significant damage and thus benefited from paying someone else to take that risk? And do you have any idea how much you're paying for the insurance?

I know, not often in recent years post Carfax inception. But Whenever I do the Math it works (for me). Here is an example for my Current lease...... Expires next month. This is directly from my lease current lease contract. Car MSRP $59,685.

One Pay Total cost for 3 years paid at Drive off Time: $15,546.12

Car Value on Open Market after 3 Years $23k give or take.

Buy out, If I were to buy the car and not give it back. (Residual + Tax) $32,720

So you can see, If I was to sell my car after 3 years, which I would as I like a new maintenance free vehicle every 2 - 3 years. I would be out by $9k. So $6k to drive a luxury German Car for 3 years is good Money in my Books.

For the Record my last car before this one was a Mercedes E350 and it Lost over $12k in the first 2 years. Again a cheap ride.

I have only ever had 2 cars that made money and I sold them before the lease end.

 

[OldShooter]

... So $6k to drive a luxury German Car for 3 years is good Money in my Books. ...

Sorry to be slow, but I've never leased a car. $2K/year is certainly a good number; I'm trying to understand it.

You paid $15K up front and then 36 lease payments of ??$, right? And sales tax? Then you walked away from the car? I'm not sure how I get a net cost of $6K out of that.

And what would your cost have been if you simply negotiated a better price than MSRP, then drove it for three years, and sold it for $23K? Certainly that would have been a $30K hit --- $10K/year. Hard for me to understand your $6K from that angle either. TANSTAAFL, after all.

 

[ShokWaveRider]

Sorry to be slow, but I've never leased a car. $2K/year is certainly a good number; I'm trying to understand it.

You paid $15K up front and then 36 lease payments of ??$, right? And sales tax? Then you walked away from the car? I'm not sure how I get a net cost of $6K out of that.

And what would your cost have been if you simply negotiated a better price than MSRP, then drove it for three years, and sold it for $23K? Certainly that would have been a $30K hit --- $10K/year. Hard for me to understand your $6K from that angle either. TANSTAAFL, after all.

Whether you buy or lease your car depreciates at the same rate. All I did was subtract the money I would have lost from what I paid. Yes you are right, it is not a real number, It still ended up costing me the $15k + for the 3 years. But I would have paid the $9k regardless. So to me it is a savings.

The loss can be devastating for a lot of American cars. But leasing still works for them too, the savings can be higher.

 

[pj.mask]

To me the question is what is better financially. If you can finance <inflation you're better off financing even if your investments just keep up with inflation. I was ready to pay cash for my car when they offered 0.9% apr. same with a house - if you can lock in $200k at 3.25% for 30 years... and deduct interest, why not?!

 

[pb4uski]

I have a 1.9% car loan too. I am very confident that my investments will earn more than 1.9% over the 5 year term. If I can't, then the interest on a $25k car loan will be the least of my worries.

 

[Walt34]

One of the problems with paying cash is that on some deals you actually get a better price IF you finance... the last two cars I have purchased I have saved $2,000 total financing..

That was our experience too with the last car we bought. When the 1st payment was due I paid off the loan but I'm betting that doesn't happen often.

BTW, they didn't even ask about income verification - just the credit score was apparently enough.

 

[Texas Proud]

I don't remember the last time I bought a new car. We always buy low mileage used with some remaining factory warranty. Let someone else take the depreciation hit...

I know everybody says to buy used and not take the depreciation hit... but when I look at the cars I am willing to buy there IS no hit...

My last purchase was a Honda Pilot... I got a brand new one for less than what some dealers were selling a year old one with 12K miles....

When you look at Toyotas and Hondas the depreciation seems to suggest that the car is good for 150K to 200K miles... (which they probably are)... so a 3 year old car that has 36K miles is selling for 75% of a new one...

I would rather buy a new one and not worry that the car had a problem that was hidden...

 

[Fedup]

It was no hit for us either. But my husband doesn't like luxury German cars. I think I spend about $1k-$2k per year per car.
I worry about buying a lemon, it will take so much energy and effort, stress is something I would like to avoid.

 

[GTFan]

I know everybody says to buy used and not take the depreciation hit... but when I look at the cars I am willing to buy there IS no hit...

My last purchase was a Honda Pilot... I got a brand new one for less than what some dealers were selling a year old one with 12K miles....

When you look at Toyotas and Hondas the depreciation seems to suggest that the car is good for 150K to 200K miles... (which they probably are)... so a 3 year old car that has 36K miles is selling for 75% of a new one...

I would rather buy a new one and not worry that the car had a problem that was hidden...

A lot of folks say buy 2-3 year old used cars, not 1 year old. That's the sweet spot for off-lease deals. And more importantly, buy cars that are not popular at the time. BIG savings there no matter if you buy new/used or when you buy them. Recent new car example last month was Sonata Limiteds which could be had at $9k or so off of list because Hyundai wanted to clear inventory.

In the used market here there's a ton of Nissan Leafs for cheap, less than $10k for 2-3 year old cars that went for $20k+ new even with tax incentives. Almost all of these are off-lease and have less than 30k miles. Yeah it's an electric with limited range but those cars are hard to beat for local use. Could drive it at least 5-6 years until the battery degradation gets bad and come out ahead, it's a throwaway car with basically no maintenance. Super cheap to buy and drive because nobody wants them used and electricity is cheaper than gas.

 

[Mulligan]

I know everybody says to buy used and not take the depreciation hit... but when I look at the cars I am willing to buy there IS no hit...

My last purchase was a Honda Pilot... I got a brand new one for less than what some dealers were selling a year old one with 12K miles....

When you look at Toyotas and Hondas the depreciation seems to suggest that the car is good for 150K to 200K miles... (which they probably are)... so a 3 year old car that has 36K miles is selling for 75% of a new one...

I would rather buy a new one and not worry that the car had a problem that was hidden...

I have never bought a new vehicle. I am 3 years into another used vehicle that is 8 years old. My last used car purchase I owned it 11 years. I am at the point now where I keep cars a long time. So next vehicle I buy will be a new one as I will keep it ten years. My thinking has gone to your way of thinking. Heck if interest rates are sub 2%, I might just get a 6 year loan and make payments instead of raiding my stash to pay it.