Should I Finance a New (or used) Car?

Matt: 00:00

Welcome to Financial Life Planning the show where we explain finance and life. And we have to wade through all of it with our financial life planning expert Mike Morton, I’m your host being Matt Robison. I'm here to ask the dumb questions. Mike is here to be smart, Mike how are you doing?

Mike: 00:17

Good man. I I still don't get why you're the host of my podcast. It’s my podcast and I don't understand this. Why did this happen this way?

Matt: 00:24

Alright, there's a long history in media, comedy TV shows, entertainment it's very hard to do a monologue. That's why monologues are very rare. It's rare to do a soliloquy in Shakespeare. It's like this is a big deal, like the spotlights on you. People like conversations. I'm here to add conversation to what would otherwise be you doing monologue.

Mike: 00:46

Yeah, but why wouldn’t I be the host of my podcast? I don't understand it.

Matt: 00:49

Not to be too meta about this. But the host usually MCs, right? And so if you're the host of your own podcast, then you invite me on. It's I'm your host, Mike Morton. Here's Matt Robison. He's some guy who's just here to ask me questions. Go ahead, Matt ask me questions, do you see how weird this just got? Look, let's go off live with all this. We will workshop how to remake a wheel that was invented thousands of years ago, but not how to have conversations in front of other people.

Mike: 01:21

In the meantime, let's have a conversation. What are we talking about today,

Matt: 01:22

Okay, so you know how the show car talk is about cars, but it's really mostly not about cars.

That's what I want to do today. I wanna talk about cars, but this isn't really about cars. The entry question, the entry point here is, Mike, should I finance my car? But I have a feeling that there's a lot more underneath this, and I'm gonna unearth it. I'm gonna drag it out of you. So here we go.

Mike: 01:22

Yeah, instead of a yes or no answer. How about I give you a, it depends.

Matt: 01:49

See, there you go. I knew this would get more complicated, so why don't you start with yes or no. How about yes? Yes. Finance your car.

Mike: 01:58

Yes. You should not finance your car. All right, so there's the answer.

Matt: 02:00

Wait. Explain what we mean by finance your car. Can I admit something? I have purchased one new car in my life. Seriously, and this was like 11 years ago. I've still got it. I have zero interest in cars. What I mean, I'm like I'm interested in them. I'm very grateful to own one but finance your car?

Mike: 02:18

Right, quick question. Was that brand new car you got 11 years ago still working well for you?

Matt: 02:27

Yeah, this show is brought to you by Toyota. By the way I don't feel…No, that was used, that was used. No, look, I don't want to feel like unpatriotic about this especially with Old Glory hanging behind me in the video. But in a Toyota, a higher percentage of parts made here in the U.S. than any other automaker. Yeah, I've got a… I got a Toyota Prius. And it is running smoothly like a charm. Yeah, it’s fantastic. You know, what you got to avoid with these things? Is my mother in law, had her Prius infested by mice, like internally, and it ruined the car. It's like the mice got in, mouse one, Toyota zero. All right. Sure. So what is financing your car? What is it?

Mike: 03:08

Yeah, first of all, oh, man, I love all these tangents. I can talk about mice on our cars, too, because we live out in the woods with mice, but I'm not gonna go down that road… when you go and buy a large purchase, like a car tens of thousands of dollars, you might not have that sitting around in your bank account to just write a check or bring in a suitcase of cash I like how we always say I'm gonna pay cash for that. Is that like, really a suitcase? Like, is that what you bring along.

Matt: 03:38

No. What you need, what you need is a bag with a dollar side on it, like literal money.

Mike: 03:42

Right put it right there on the desk. So often we would finance or borrow money. That's what it means, borrowing money to buy the car. So whether it's a new car or a used car. The question today, you know, that came up with a friend of mine was, should I borrow money? You know, Should I get a loan and borrow money to buy this car? Or should I pay cash? You know, If you have that as an option, if you're able to sell some investments emergency funds or whatever it is. So should you finance, when we say finance a car, we mean should you borrow some money? Now if, and there's a couple of nuances here too, if you're buying a new car, we could be talking about leasing or buying. So I'm not talking about leasing. So this is, you're gonna own a car, whether it's a brand new car or a used car. but should you borrow some money, finance it, borrow some money to do that and get a car loan or should you try to pay using your own money.

Matt: 04:35

I knew it, I knew this would get deeper than it appeared on the surface, because it sounds like what we're really talking about here is if you're facing a large purchase, generically, houses are something else, but like, cars are the number one culprit here. But if you're facing a large purchase, when does it make sense to borrow and when does it make sense to use available

cash, if that's an option?

Mike: 05:00

Yeah, there you go. And so lets talk ab out car loans, and this changes over time. All right. So if we were talking a year ago, whether it's housing or cars or other stuff, right, inflation numbers, interest payments all change. So we're talking today, this is early 2023, with the current interest rate and car loan rates. So current car loan rates are about 6 to 7% interest. Okay, so whether you get like a three year, four year, five year loan, they tend to be that length and time, you'll pay interest, you'll pay the principal and interest but the interest is what we call amortize spread equal payments for those four years, say, and it'll be about 6 or 7% borrowing rate, alright. Important to know, because here's, here's my conclusion, my recommendation that you consider, this is not financial advice, all the points and thoughts is, if you're gonna borrow at 6 or 7%, I would try to pay cash as much as possible and not borrow at that rate. Well, the reason why is you're paying quite a bit in interest, and you're not really, it's gonna be hard to make that up just right now you can get in cash. And we talked about this, and I'll continue to hammer it, but you should be getting above 4% interest rates on most of your cash, maybe not your everyday checking or saving in your in your bank account banks, interest rates are lower than that. But say your emergency funds, your portfolio that's in stocks and bonds, the cash portion of that you should be at over 4%. That's where the rates are right now on very safe treasury bonds. So anyway, you get 4%. So now you're paying 6%, you know, to borrow money. So instead of paying 6 or 7%, to borrow money, and only making 4%, on that cash, I would go ahead and spend that, you know, and then build up, build it back up in your portfolio.

Matt: 06:49

Does it make a difference if you're being offered, I'm gonna sound like Dr. Evil saying lasers here, if you're being offered financing from the car dealer versus going out and getting a loan from a bank.

Mike: 07:04

Yeah, so here's the deal. No, it won't make any difference, right. But sometimes, the car dealers can give you better rates. So at a car dealer and you're saying, okay, I'm gonna buy this this new car for $40,000, get your trade-in, you know, and and so it's 35 grand or whatever you're gonna be spending, and they say, Hey, we work with this bank. We can get you a 4.2% loan. Then I would think, oh, that's not too bad. Like 4%, I would consider that, okay, so 4 or 5%, if that's what you're hearing at the car dealership, if they're able to get you something like that, I would. Once you get to 6, 7%, as I said, eh, I become a little bit less interested because you're paying quite a bit, and that's hard to make up. Now you can argue, well, geez, I'd have the cash, I can invest it in the stock market. Right? If I had that 30,000, I could have it invested in the stock market and I'll pay off the car loan, just over time from my income. Right? So that's a, that's not a bad option. Well, The stock market can make 8 to 10%. So now we're comparing 8 to 10% versus 6 to 7% loan. So it's kind of better to get the 8 and 10% and pay the loan, but it's not guaranteed. Stock market returns are nowhere near guaranteed. So you're still paying quite a bit of interest, 6-7%. The other thing I'll mention, Matt, is that you can also potentially use your home equity line oof credit. Which are hovering around that same 6 or 7%. So if you need to swing some money for say a few months, rather than getting locked in to a financing for a car loan, which is four years, five years, at 6 or 7%, you could potentially use your home equity line of credit, spend, you know, the difference. Maybe you need 10 or 20,000, you know, to make up that difference. Like you don't have sitting around in the bank, but you can quickly pay that off over three months from your income or this year, you know, one year from your income. Pay that back down. So it's an easy way of borrowing and paying it down more quickly than taking out a six, 7% loan over four or five years.

Matt: 09:01

I was wondering if we were gonna get back to helocs, which as I understand it, are the thing that you fly around in if you're going to assault a compound and you need to fast rope down quickly. So a heloc home equity line of credit, just remind me here, we did a whole show about this. People can go check that out. It's in the feed of financial life planning, but are you talking about a situation if I have a home equity line of credit, am I locked in? Let's say I had one and I got it like a year ago when interest rates were way lower. Does that mean that I still have the opportunity to borrow at that nice low rate now or am I still borrowing money at a, at a really high rate?

Mike: 09:41

Wait, are you saying after all our shows together Matt, you still haven't gotten your home equity line of credit.

Matt: 09:45

I'm trying to I'm still trying to figure out the difference between a banking and a checking account. Like, your savings when there's something called a CD, which I'm pretty sure I got rid of that for Spotify, right?

Mike: 09:57

Yeah, that's right. Yeah. Who uses CDs anymore?

Matt: 09:59

I don’t know!

Mike: 10:00

Holy smokes. All right, Matt. Honestly, man, you need to go back and listen to the feed, please.

Matt: 10:06

Okay, let me just, I recorded it on my VCR. Let me just, you know, I'll get Yeah. Alright.

Mike: 10:13

So I wish that was true. So great I can lock in, you know that home equity line of credit from a year ago. But unfortunately, it's not true. Those are those are floating rates. So me Matt, every month I've been getting an envelope from my bank, I opened it up, oh, your new interest rates on your heloc is now at five and a half percent. Now it's 6%. Now it's six and a quarter percent, it just keeps going up every month. Now, usually with heloc, you have a 10 year borrowing window. That's why I recommend you can open it up but you don't have to borrow. And you typically get 10 years where you can write checks, you know, and then you can pay it back. And then you can write another check. So you can have kind of a you know, you can take out 10,000 for some home renovation, pay that down, you can take out another 15,000 pay that down after 10 years, they typically take whatever you've got that balance and amortize it, which just means you're making equal payments, you know, for another 20 years. Now, this is unlike your mortgage. And this is why mortgages are awesome. And for everyone listening that has a mortgage that started one to three years ago, pat yourself on the back, turn around, try to pat yourself on the back because you have a nice low interest rate. Okay, so that's locked in and that's awesome.

Matt: 11:23

I see. Okay, so it's not like when you suggest this heloc maneuver, which is I understand it is an MMA hold that might get your opponent to tap out if you're going to put someone in a heloc. Yeah I mean a heloc is pretty painful. If you're in a heloc, Like you're pretty much tapping out.

Mike: 11:43

I’m about to tap out of this episode where’s your question Matt.

Matt: 11:47

What, when you suggested a moment ago that you tried the heloc maneuver, this is not, you're still locked into the same basic problem here of you're borrowing a lot of money, you're borrowing money at a high interest rate. So that's why essentially back to your core point, if you've got the cash it, it's worth it.

Mike: 12:09

It's worth considering. Yeah, it's certainly worth considering. So a lot of listeners might have some emergency funds built up. Hey, in case of emergency, and I'm not saying a new, a new car or having to get a different car is an emergency for sure, but you could use 10 or 20,000 and then pay yourself back. Alright. So that's definitely an option to consider. The reason I mentioned the heloc is because I love car loans. If you can get them where there's no prepayment penalty, so in other words, you walk in, I got this five years ago with my last car, , and it was, hey, if you finance with us, we can get you like a 1.5% rate. And I'm like, great, can I pay it off any time? Sure. You just have to keep it for three months, okay, great. I have to make three months payments and then I can pay it off anytime I want, and that gives me the flexibility to decide when I want to pay that thing off. So if you can get that, fantastic, go for it.

You know, You can delay by three months, you can make a better decision, right? That's not a big deal. What I don't like is for you to sign paperwork that's 7% interest rate and four years and you can't get out of it. That's what the beauty of the heloc is, you can pay it back down as fast as you want. So if you don't have that 10 or 20,000 extra, you know, make the difference.

You can go ahead and use the heloc and then pay it down over six months or 12 months, you know, and you can get out of it as soon as you want to. It's not up to the bank.

Matt: 13:28

Alright, since you invoked the L word before, not the fun one, but the other one, leasing I just want to go there for a second because this is one of those things that adults know about. You can lease a car. I know people who have leased cars and I think I missed that day in school where they explained that you can lease a car. I seriously and maybe I should be embarrassed about this. I was like into my 40s before I really began to have an inkling of what the hell leasing a car is. So you can just skip over the ABCs of that for our listeners who are like thinking to themselves. Oh, Matt, but what about that trade off of you need a car you need something new? You could take out a loan. You could try and scrape together available cash or you could lease. What about the lease option? Is that more attractive?

Mike: 14:20

Yeah, you know, to be honest, Matt, I'm kind of like you I didn't know leasing you know was a thing and I always thought it was like for super rich people who like always have a brand new car and just lease.

Matt: 14:29

I'm feeling so much better now. Really?

Mike: 14:33

I was thinking what you were saying, that’d be like, Matt, you can host your own podcast you can host someone else's podcast and, uh, you don't need to know anything.

Matt: 14:39

This is seriously like the episode of Saturday Night Live of Lothar and the Hill People where the two tribal leaders get together they're like, I did not know that you as well felt this way about the perils of walking with women. And like I'm just delighted to hear it’s like no Matt, I'm a financial advisor. I don't know what the hell leasing is either. This is great. You just made my day.

Mike: 15:01

I know what it is Matt.

Matt: 15:03

Oh, shut up. I like what you were saying a minute ago better. Let's go back to that. Go back to the: ‘No, you're not dumb’.

Mike: 15:09

Here's an interesting thing on that. So leasing, you know, you just have car payments and then at the end, you can decide whether you want to make one single payment on the car or just turn it back in. Here's something interesting everybody's got money scripts and money habits and how you grew up with money, right? And for me, I've always been an own it guy, like buy the car, own the car. I've never been, I've never had car payments now. And so like the idea of car payments, you know, it's like, why would I want a monthly payment because I've never had one, I've never grown up in an environment where that was the thing. And so that's kind of my money script is I do like to own things. I like to you know, I do what brings me a lot of joy to have ownership of something that I can do whatever I want with that. But I'll just be honest, like that's, you know, we can run numbers and talk all about that stuff. Leasing generally isn't the best option. But it certainly has lots of values, because you always have a newer car, you know, you're paying for it. But you have the benefit of always having a nicer newer car that's being maintained for you, it's not going to break down as much you don't have to hassle with all those things. But there it gives you a little insight, like we all have those kinds of money scripts, how we approach these these questions based on you know, just really growing up in environments.

Matt: 16:24

It feels like a marketing thing. Because as you say that it makes me realize, when you say lease a car, it's the same meaning as you rent an apartment, you don't own it, you're renting it, you are paying for the privilege of the use of this thing. I see what you mean, it's weird because I grew up in a rented apartment. And so paying the rent was like, yeah, that's the way life is done. But it's true that as an adult, I came around to, I don't like being in hock to someone. And when I have the chance I want to buy it's like the whole solar panel model like every company is trying to sell you on us like, oh, there's no money up front it lowers your bills. It's like, hold on, let me see through this for a second. What you're really talking about is you are renting these. And in fact, that's not even really what's happening. They're renting the use of your room, your rent. Yeah, they're not even really paying you directly. It's a very, it's a very weird thing. I'm not disparaging the solar panel, model. I'm not disparaging the leasing model. I'm just validating that. There's a there's an emotional component to this. And like it would feel strange to have my car. It's like, I don't own this. I'm renting it. I'm renting the rights to drive this car from Toyota. Very strange.

Mike: 17:51

Yeah, yeah. No, I mean, I think it's good. Again, there's no right or wrong, you know, and recognize that there's value on all sides, right renting it, you know, it's a great analogy, because renting an apartment, there's so much value in that right, the flexibility, you don't have to maintain it. You don't have to do breaks, you call somebody? I mean, there's tons of value on both sides.

Matt: 18:08

All right. That makes sense. I do want to get my emotions out of the way, with financial decisions. But your point, and the reason you call your podcast financial life planning is there is a value to that too, if you're not comfortable and happy and if it's going to cause you stress. Maybe this kind of takes it full circle to this whole decision about should you use available cash. How much does the emotional component factor in there. You're saying, look, it's not a great financial environment right now to borrow at a high interest rate to buy a car, so don't finance a car if you can. If you can do it your arbitrage is better using up the cash instead of trying to invest it and make up the difference and all that. How much of a factor is the emotional factor of if it matters to you to have that emergency cash? You know what, just take the financial hit or is this just this is the right way to do it either way.

Mike: 19:03

Man, perfect question. I'm so glad I hired you as the host of this podcast and pay you nothing.

Matt: 19:08

You didn't you don't own me. You rent me.

Mike: 19:11

That’s right I have rented you, just for this thirty minutes.

Matt: 19:15

Oh my gosh, what a horrible business I’m in, rent a host.

Mike: 19:22

The terrible part about your business model is that it's free. But you'll make it up on volume I'm sure I think.\

Matt: 19:28

You're the one who's paying for it ultimately, one way or the other, or the other.

Mike: 19:33

But here's the thing is like, it's a perfect question, Matt, because the answer is the emotions always win out. That is the way to go through living your life. I want you to be comfortable and confident in the way that you're walking through life, including financial decisions. So if you were to say to me, man, I hate having debt. I'm paying off my mortgage as fast as possible, even though it's 3%, I would like pull my hair out. That's like a crazy idea. Don't do that. But many, many, many people, many, many smart, super smart financial people, that's what they do, pay down their mortgage as fast as possible debt free, the best day of their life is when they paid off their mortgage because it, they just feel great. So the same is true with the car. If you need, 25,000 of that emergency fund sitting in that count so that you feel comfortable, you know, week in and week out and you don’t want to use 10,000 of it, then don't.

Matt: 20:26

You know what I found really helpful in a previous conversation we had was when you gave the insight, don't think about your house as an investment. And that really resonated for me because it's something that even with my training in economics, I never really got I remember, during the housing crisis of 2008, it was some smart writer, I don't think it was Michael Lewis, but to some smart writer, who was talking about people who are underwater, with their homes, meaning they were paying more than their houses were worth. And the sentence that really stuck with me was eventually it dawned on a lot of these people, that they did not own their house in any meaningful sense of the word. And I took me a long time, and a lot of dredging out old economics training, to understand the meaning of the sentence, I still only think I get it, I think that what it's saying is, if what you're paying is more than it's worth, you're renting for this asset, but you don't have equity in it, you're not like you're not accruing a valuable financial asset. So there's nothing that you end up owning. So I understand that as a financial analysis. But I disagree emotionally, because I'm getting to live in the house. So even if I'm underwater, if I'm not thinking about it as an investment, if this is I am paying to live in this house, because I intend to live in this house long term, then ultimately, if I just pay more, it doesn't really bother me. What really matters to me is, am I paying what this experience is worth to me? And what I can afford? It doesn't really matter to me, whether I'm paying more than the current market price, or not. I know that's financially all wrong. But to me emotionally, it feels all right.

Mike: 22:25

Yeah, yeah. Now I'm not gonna go into the housing crisis and the underwater and we could dissect that sentence and everything else. But I will agree with you that I want the listeners to be emotionally satisfied and happy with all of your decisions. And it's I mean, we go into marketing, the whole thing is just based on emotions, there's never any numbers involved in in most of your spending every week, and we're talking about that the numbers, but let's be honest, I want you to be really happy. And we're talking longer term, you know, and day to day with all decisions. So yeah, 100%, you got to you got to bring it in.

Matt: 23:04

This is why you give the standard disclaimer of I'm not providing financial advice, because you know, you're required to do that you don't want to get sued, I don't want you to get sued either. But I think you really mean it, I think you actually mean it that you're just giving here is a way to think about it from purely financial terms. But you're really leaving this in people's hands like the numbers say, if you're thinking about financing a car right now, it doesn't make dollars and cents. But it is still possible that if this is what makes you comfortable and your eyes wide open on the trade offs, it could still be right for you.

Mike: 23:40

Yeah, more information so you can make a better informed decision for you.

Matt: 23:44

Awesome. I think that's a great note to end on. Alright, man, your rental of Matt Robison, the host of your podcast, financial life planning is up. You can for an exorbitant rate re-up for another episode next time. We'll see if that happens.

Mike: 23:59

Thanks, Matt.

Mike: 24:01

Thanks for joining us on financial planning for entrepreneurs. If you liked what you heard, please subscribe to and rate the podcast on Apple, iTunes, Google Play Spotify, or wherever you get your podcasts. You can connect with me at LinkedIn for Morton financial advice.com. I'd love to get your feedback. If you have a comment or a question, please email me at financial planning . Until next time, thanks for tuning in. This recording is for informational purposes only and should not be considered for investment advice or opinions expressed as our of the date of recording. Such opinions are subject to change. We do not guarantee the accuracy or completeness of the data presented here.