Rethink Financing a Car for 75 Months If You're This Close to Retirement
Buying a new car when you're close to retiring can feel like a practical upgrade, but how you pay for it matters.
The average price for a new car is $49,461, according to Kelley Blue Book (KBB), and while it might be tempting to stretch out your payments over a 75-month loan, that could put a serious strain on your budget in the long run.
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Before committing, here are the things experts say to be aware of, along with the one big danger that could happen.
The Age at Which You Should Avoid Financing a Car Loan for 75 Months
The path to retirement looks different for everyone, but there is a general rule for buying a car when you’re close to retirement, according to Danny Ray, founder of PinnacleQuote.
“Once someone is within about five to 10 years of retirement, they should be very cautious about taking on a 75-month car loan,” he explained.
The concern is not just the payment. “It is the risk of carrying long-term debt into a period when income is likely to become more fixed and less flexible,” Ray said.
Why a 75-Month Loan Is Risky for Retirees
Taking out a long-term loan can be risky because a 75-month term often creates the illusion of affordability through lower monthly payments while increasing interest costs.
“Many borrowers end up owing more on the vehicle than it is worth for a large portion of the loan term,” Ray explained.
That becomes a problem if the car needs to be replaced, income changes or unexpected medical or living expenses arise. Plus, you don’t want to pay more than what the car is worth.
Consider Debt-to-Income Ratio
Another thing to look at is the debt-to-equity income — how much of your monthly income goes toward debt.
“The standard rule of thumb for non-retirees is that your monthly debt payments should not exceed 36% of all of your income sources,” said Eric Mangold, certified wealth strategist (CWS) and founder of Argosy Wealth Management. “But for retirees, it should be lower, ideally 20% to 30%.”
The closer you are to retirement, the more important it becomes to keep monthly debt obligations low.
How Much To Spend on a Car
You don’t want to drown in debt over a car, so the monthly payment should ideally never exceed 15% of take-home monthly income, according to Peter Diamond, federally licensed tax, accounting, real estate and structure and certified bankability expert.
“If a retiree has $5,000 per month in combined take-home income, a car payment should ideally stay at $750 or less — and lower is even better,” he said.
The less retirement income tied up in a car payment, the more financial flexibility you’ll have later on.
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Understand That a Vehicle Is a Depreciating Asset
Your car's value drops the second it's driven off the lot. In the first year of ownership, the value falls 12.5%, per CarFax data. Making extended loan payments creates a "greater risk of being upside down, where you owe more than the car is worth," Diamond said.
With that in mind, he isn’t completely against a lengthy loan.
“A 75-month loan is not automatically a bad decision, especially for someone nearing or in retirement, if it’s done intentionally and with a full understanding of the bigger picture,” Diamond said.
Why Interest Rates Matter More for Retirees
Paying more in interest isn’t ideal for anyone, but rates matter even more for near-retirees because borrowing costs can compound over such a long repayment window.
“Older adults should think about how the loan fits into future retirement cash flow, not just current income,” Ray said. “A payment that feels manageable while working full time may become stressful once income shifts to Social Security, retirement distributions or investment income.”
The Biggest Danger Is Timing
A 75-month loan can easily outlast a person’s working years.
“Overall, carrying car debt deep into retirement reduces financial flexibility at the exact stage of life when flexibility matters most,” Ray said. “Near retirement, shorter loan terms, larger down payments or buying a less expensive vehicle are usually safer financial decisions,” he added.
A 75-month loan can preserve cash flow, but also eat into your retirement savings, so approach with caution and realistic budgeting, experts advise.
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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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