Purchase v. Lease v. Finance

I agree with the Doc and Frank Parker, cash for the toys, If they cost more than what you have in handy cash, shouldn't be buying them.


But then I don't have a Ferrari.... maybe that explains a lot!!

 

Pay cash.

 

One question: how bad do you want to have one?

 

Alright, I'm feeling better now.

 

I haven't yet purchased a Ferrari, but here is my take on purchasing cars and other similarly priced items.
If you are fantastically wealthy, endowed with substantial positive cashflow and nearly inexhaustable assets, then who cares - simply buy your 250 SWB or NART Spider with cash and be done with it. Why worry about opportunity cost when it simply distracts you from the vital search for the finest pearls to grind into this evening's bordeaux.
Now, if you fall into somewhere below this lofty financial status, but above the mean, then you must examine your own situation. Interest rates are still low in real and nominal terms, and sound economic theory would suggest that the opportunity cost of your Ferrari money is rather higher than the tax deduction adjusted interest rate on a home equity loan. Admittedly, if you know the specific investments that will yeild this return, I would be most grateful for a discreet PM . . . Many reasonably sucessful Americans find themselves relatively income rich and asset poor, so borrowing money to preserve a limited supply of free capital makes sense.
On the other hand, there is a certain satisfaction that comes from actually owning your toys outright (see example with pearls and wine above for motivation). Furthermore, if for whatever reason, you feel that you cannot earn an sufficient rate of return on your capital to cover the interest rate on the load/lease, or you are particularly paranoid about maintaining your cash flow and you have substantial liquid assets in excess of the purchase price of the car, you just might find that you sleep better if you purchaser the car outright.
HESSIAN

 

Ding, ding, ding - we have a winner!

1. Think about the opportunity cost of putting the cash down to buy your car, and the after-tax rate of return it could earn if deployed elsewhere

2. Think about the tax benefits of leasing through a business, if possible and legitimate

3. Think about the friction costs of getting out of / rolling over your leases - they are there, and they can bite you in the a$$ if you're not careful

4. Think about lots of other things, and then think some more. Leases can be good, leases can be bad - it all depends on YOUR specific situation, including the terms and conditions of your lease

5. Do a search on this board - lots of intelligent answers written by people a lot smarter than me on this very same question, many relatively recently

ghost has just gotten home from work. ghost has a 7am conference call. ghost is now tired, and is going to bed.

 

think about having a ferrari.

 

IF you cant afford to buy it for cash you cant afford the car also you will feel better if its all yours instead of a monthly payment every month

 

Good point - the monthly payments to finance / lease should never be used as substitute for buying a car that you can't afford, something which has been confused on this thread.

Know you can buy the car with cash outright, with a significant and large monetary cushion, THEN decide on the virtues of financing and leasing. The two decisions are somewhat exclusive.

 

How I did it:
I started a savings account for my carback in 1996. After about $20,000+ was in it I started looking for a 308 QV. A good one came along in Sept 1997 and I borrowed the rest on a two year note which was around $12-13k. I really didn't want to do this but I did not want to let that car go to someone else. I paid it off in a year.
Basically I used a big down payment and a quick loan to secure the car I wanted but I got out of the note as quick as I could.
Another thing I did was to keep making the "regular" payments(not the bigger payments that I actually made) to the savings account like I was still paying for the car after it was paid off. That is the money I use for repair/mods/maint./car club/National meet $/track events, etc. It has it's own little savings account to support itself.
This system works pretty well for me. I own the car outright, and I always have money for the things that come along with it without tapping into my usual checking accounts.

 

Agreed

 

The question is not whether you CAN or CANT pay cash. I couldve paid cash for my 360 many times over, but that would have been a stupid use of capital. I used the banks money to buy the car, and used my capital to invest it and make more money. Cash tied up in a car wont produce any more cash (except under rare circumstances), but invested cash has the potential for future returns. Basic finance principle. Why have a paid off house when you can mortgage it and buy a second rental home as an investment? Why have big money sitting in a savings account? Why have a $200K car paid off when you could have bought a $1MM building with that cash? Of course, everybody's situation is different (ie age, income, net worth, etc etc).

Even if you CAN pay cash, you shouldnt - unless you have certain psychological motives for doing so or are worth high eight digits plus, then it really doesnt matter.

Ernesto

 

I'm a bit surprised no one else has chimed in about a line of credit on a home. IF it is your druthers to finance with a conventional car loan, it would seem to me (as I said in my post yesterday) that the most fiscally-advantageous means would be to pay for part (or all) of the car with a home equity line of credit. The rates are often comparable to -- or lower than -- a car loan, the interest is deducitble (which in a sense lowers the 'imputed' interest rate even further -- a 4% car loan [if there were such a thing] is probably on par with a 6% HELOC when you factor in the tax deductions the latter gives [depeding on your tax bracket]). Also, when you use a HELOC, you write a check from it to yourself and deposit money in your own bank account and then can literally go and negotiate as if you were buying with cash (because you would be as far as the dealer is concerned). This gives you much more leverage in terms of negotiating a price. Finally, since you essentially own the car outright, you get to dictate your own terms with insurance. You could even be super-ballsy/stupid and elect to get minimal coverage (no comp or collision) which I of course would not recommend but you could do. With a bank loan or lease, they stipulate terms.

In summary, a HELOC (if an available option to you):

...usually has lower interest rates than conventional car loans/leases
...'s interest is tax deductible
....gives you leverage and a negotiating edge equal to an outright cash purchase
...lets you dictate your own insurance coverage limitations and deductibles (like an outright cash purchase)

SOOOOoooo. IF you can't afford to buy with all cash but still want the car, evaluate your situation and decide if you still want to go through with it. If you do and you own your apartment as you said you did, consider financing with a means that gives you the benefits I described. That would be my advice.

 

these are really good points

 

I have my 30 year mortgage at 5.125% (yes, my wife was a genius to refinance when the rates were there!). Since I can invest my money at a much better return than that, why pay it off??

OTOH, if the best you can get on a Ferrari loan is more than you can make investing, then I agree that financing a toy may be overextending yourself.

Ken

 

Thank you - point #1 in my earlier post.

 

There's one other possibility you might want to be aware of. I used it to buy my Diablo. I didn't have sufficient equity in my house to cover the entire car cost. So instead, I have a loan for the car in which the car is the primary collateral and the bank put a lien on my house as secondary collateral. The advantage is that I get all of the tax-deductible interest benefits and a better rate without having to have 100% of the car cost in equity.

Now of course, I would be very careful in using such a plan. Obviously it's stupid to jeopardize your house for a toy. You will want to make sure that either a) you can pay off the car if need be to protect the house or b) you only finance so much of the car that even including future depreciation, you could always get enough for the car to cover the loan. This means having an appreciable down payment.

I don't agree with those who say that if you can't pay cash you can't afford it. I do agree that that is the smartest way to buy, but not the only. I bought my Testarossa in 1997 when I was making $40k/year. At the time I was sharing a house with my brother and had very few expenses. I took out a long loan (5 years) but worked hard to pay it back quickly (3 years). There's no question that if I'd invested that money, I would have made a lot more over the years, but there's no price I could put on the enjoyment I've had out of that car and the associated friendships either. Be smart, but don't wait till you're too old to enjoy it.

 

This is almost exactly what I do.
A toy is a toy. I would NEVER let the expense of it get in the way of everything else me and my family do.

Apparently, there are a lot of stellar investors on the board. Anyone want to give their sob story about financing an expensive toy, investing the money, then getting burned? I would imagine it happens all the time!

 

Buying a $200K car cash represents a 100% chance of making no money. Financing the car and investing the capital stands a good chance of making money if done wisely. I'd take the latter, thank you very much.

Bottom line is that you dont bite into more than you can chew. If you are scared that if times go bad and you cant make the payments, then you probably cant afford it anyway. People's fear of financing never ceases to amaze me. I guess some dont have self control and are scared of financing their lives away.

 

t88power and FrankTavani:
Thank you for your advice and stating it simply for those of us -- to which I'm guessing must only be me -- who don't care to waste our brain cells and spare time playing investment person I'd rather pay someone to do that when I'm back to pulling a paycheck, just like some people would rather have a professional mechanic work on their car than do it themselves.

Since I do own my own house (5.0% interest rate...thank you VA!) I see I have options. Yes, paying cash would be a nice luxury but I'm an impatient person, I only make a middle five-digit salary, and since I don't know when I'm going to die I would like to play while I can

It's interesting to see other's viewpoints. I don't agree with some of them but different folks, different strokes Ain't nuttin' wrong wit dat!

 

although this is true, its also true that financing a car and investing the money (which could have been used to buy it) has xx% chance (where 'xx' is some number greater than zero) of making no money.

You can play the odds and invest the money and come out ahead. You can also loose the money. The previous poster's point about buying the car with cash was that you at least eliminate the possibility -- even if its a small one -- of losing the money on an investment. True, you could lose a lot in depreciation on the car (assuming its new), but you still have an asset to sell. Dump the money in a one million dollar real estate investment (or any investiment) and have that respective market tank on you means you can lose all of you money. No one really knows what the future will hold, depsite the best efforts of financial planners and advisers.

Good points all.

 

I guess I fall in between the Ric Edelman philosophy and the Dave Ramsey phiolsophy. I think it may sometimes be wise to not make a bigger payment, just put that extra money elsewhere with a good return. I also like not owing money to someone.
The bottom line is don't screw up your life for a car. Get one when you can - without having to make big sacrifices to do so.

Just remember, there is absolutely nothing at all wrong with the concept of delayed gratification.

 

AGREED !!!

Finance Real Estate , not Cars !!!

In the Long Run, you'll be Pleased with this advice.

 

The stock market has out performed real-estate, although sometimes I doubt it hehe.

I don't subscribe to the "if you can't afford to pay cash..." theory. I'd rather have my money actively working for me than sitting in a depreciating asset. Yes, you run a risk of loosing money in the market or other investments. But the S&P500 grows at a pretty decent rate, even with the few dips here and there. Lets say you took the plunge and invested your capital into an index fund that tracks one of the big indexes, the S&P500 for example. Even if you only gained 10% (after you factor out your overhead) every year for 5 years (life of a std. auto loan), and factored in inflation @2% yearly, you still have made money. Or at least had the loan paid for you without loosing your initial investment.

If I bought a car for 100K today, and kept it 5 years, then I've already lost 10% of the buying power of my dollar (assuming inflation stays constant at 2%/yr). Not to mention the depreciation of the asset as a whole.

HELCO loans have their advantages as well, the tax reduction is very beneficial. The market doesn't go super-nova overnight, so worst case you get paranoid and remove your money from the market. If that happened, you'd be out some capital. Worst case, sell the vehicle (taking a small hit), and add up what you lost. Is what you lost worth the joy of owning the car, even for a short time? Hopefully yes

I'm not a financial guru, but I did stay at a Holiday Inn last night.

 

Love it!

I joined this site to learn about these wonderful cars, but I am also learning a lot about how all you successful people think financially.

Awesome! Keep it coming!