How Financing a Car in Retirement Can Beat Paying Cash (Even If It Feels Wrong)
The golden rule of auto financing is to avoid it — and the interest payments that come with it — if you have the means to pay cash. However, there are a handful of circumstances in which monthly payments are preferable to free-and-clear ownership, especially for those in or near retirement.
For most retirees, less debt is usually better. However, it can sometimes make sense for them to finance a car rather than buy it outright, even if they can afford to do so.
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Psychologically, a car with no car payments is a powerful feeling, but the math must back up the emotion. This article will explain when a loan might make more sense.
If You Don’t Have a Cash Cushion — A Big One
Debt can indeed be dangerous in retirement, but so can being cash-poor, even if you’re house- or car-rich. As Kelley Blue Book (KBB) notes, buying a car with cash can save you thousands on loan interest, give you instant full equity and limit you to spending only what you can afford.
However, those benefits evaporate if buying a car leaves you with too little cash to get by comfortably or weather a downturn or forces you to take on debt to pay the bills. Don’t pay cash if doing so depletes your emergency fund, threatens you with financial strain or forces you to settle for an unsafe, high-mileage vehicle that is destined for money-pit status.
If You Qualify for No- or Low-Interest Financing
Highly qualified buyers can get the best of both worlds — a big-ticket purchase spread out into payments, but with no interest charges. For example, retirees with the right credit score and financial profile can finance a Hyundai Santa Fe at 0% APR for up to 60 months, with no payments for 90 days or choose 1.9% APR for 72 months.
Similarly, the Mazda CX-50 comes with a 0% APR offer for 36 months, plus the same 90-day deferred payment perk — and those are just two of many deals KBB reported on as available as of July 17.
If You Can Borrow Low and Earn High
Any retiree weighing paying cash vs. financing a car should consider the concept of positive arbitrage. If interest or investment returns earned are greater than the interest paid on a loan, it’s better to keep the money in play instead of paying off the loan.
For example:
A retiree has $30,000 to buy a car with cash or put in an FDIC-insured money market account.
The buyer qualifies for a special 3% APR.
The money market account pays a 5% APY.
The retiree earns 2% with the money market account (5% yield minus 3% interest).
The retiree earns nothing by paying for the car in full.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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