Getting a car? Here are three options for paying for your new ride
Q: I've got my eye on a used 2018 SUV from a dealership in Burlington. The total price with taxes is about $35,000, after a small trade-in allowance. I've managed to save this amount of money over the last several years because I knew my old Betsy was nearing her final days. I could pay cash for the SUV, but the dealer has offered me a five-year loan at 0.9 per cent financing. Should I buy it with the cash I have, or accept their offer for financing?
A: My condolences on the demise of Betsy. Be sure to take a photo before you trade her in so you don't forget the ol' gal.
As for your new four-wheeled love, you have three options:
1) Pay for the vehicle outright with the money you have saved. This option allows you to drive her off the lot and she's yours with no encumbrances. In this case, why not continue your good habit of putting money aside every month, to create an automobile fund" that will cover any future repairs or maintenance? It will feel the same from a cash-flow perspective, and it will also feel great when your car needs repairs in the future and you can cover them with cash rather than from your other savings or earnings. Any excess in this account can go toward your next vehicle, hopefully many years from now. Rinse and repeat for as long as you continue to drive.
2) Accept the dealership's offer of 0.9 per cent financing over the next five years. This option allows you to keep your $35,000 and invest it. The loan will appear as a lien against the vehicle, so you won't own it outright; and the loan will also appear on your credit history. This isn't necessarily a bad thing, but any missed or late payment could affect your credit score, so be sure you meet that commitment every month. Since you still have your $35,000, go ahead and invest those monies over the next five years and set up a SWiP (Systematic Withdrawal Plan) from your investment account to deposit the monthly vehicle payment into your bank account a few days before the dealership makes the withdrawal for your vehicle financing. Even though you'll be withdrawing money from your investment each month, at the end of the five-year term, your vehicle will be paid off and you'll still have money left over from the investment because it was growing over the five years. This excess can be the start of savings for your next set of wheels.
3) Again, pay for the vehicle with your savings. But then take out a personal loan or line of credit for the same $35,000 and invest those monies. Of course, now you'll have to start making monthly payments on the debt, just as you would if you opted for the dealer's financing. Structure your monthly payments so the debt will be paid off in five years. At that time, your $35,000 will have increased in value, depending on the specific investments you choose. But there's a bonus with this strategy. The annual interest that accrues on this debt becomes tax-deductible on your income tax return. Canada Revenue Agency (CRA) states that interest payable on borrowed monies for investment purposes gets deducted off your taxable income, dollar for dollar. In turn, this puts even more money back into your pocket and increases your after-tax rate of return.
You now have three decent strategies when you go to purchase your new-to-you SUV. Pick the one that's most relevant to your financial situation and most comfortable for you, while you say a tearful goodbye to your old flame, Betsy.
Thie Convery, R.F.P., CFP, CIM, FMA, FCSI, is a wealth advisor in Dundas. Her column appears bi-weekly in The Hamilton Spectator. Thie invites your questions at TheSpecMoney@gmail.com or by visiting ConveryWealth.com