San Antonio Express-News (Sunday)
Cash or loan for a new car? Why pay down a mortgage?
Q. My husband wants to buy a car costing $40,000 new to do night photography in places like Big Bend. He has sufficient funds in his low-interest savings account at a credit union to pay cash. We have three months’ salary of savings available, a moderate retirement fund and some savings for college for our kids, which will start in 2024.
The vehicle, once purchased, will be used until it is at the end of its life. Should he just pay the $40,000 cash for the new car? Or is it better to do a loan? The money is currently sitting in an account making something like 1 percent.
This is not a necessity purchase, but it will be used extensively for its intended purpose (backcountry driving for professional-quality photography). The sales from the photography are not likely to cover the cost of the car. If it would bring in, maybe, less than $7,500 per year, would it be worth it to claim this purchase as a business expense?
A: There are at least two big parts to this question.
The first is whether and in what circumstances it makes sense to pay cash for a car versus taking out a loan. I have spoken to sophisticated people over the years who insist that a depreciating asset like a car should be bought with debt; they would never use cash when debt is available.
I disagree. If you’ve got the cash, pay with cash. Cash may make your husband a more constrained purchaser (willing to forgo all the add-ons he will get pitched) at the car lot. Cash makes the automobile purchasing process simpler by eliminating complicated moving parts around the cost of debt, interest rates and monthly payments that car dealers use to obfuscate how much a car actually costs.
The good news is that later — a month later, a year later — your husband can, if he needs to, approach your credit union and inquire about borrowing against the car.
When might he want to borrow against the car? The most obvious reason from your question is that starting in 2024 your household expenses will jump drastically. College is crazy expensive! Federal student loans for undergraduate education currently cost 4.99 percent. Private loans will cost more than that.
If in 2024 you are able to borrow, for example, $20,000 against his car at a rate lower than you will borrow for tuition payments, that is not a terrible option. Credit union auto loan rates for good credit borrowers are currently in the range of 6 to 6.5 percent. At current rates, auto loans are above federal loans but might be below private tuition loans, so it could be a tool in your borrowing arsenal.
But who knows? Maybe your kid will get a scholarship sufficient to not need additional
debt.
Second, the issue of business expenses to offset photography income is a really important consideration. If your husband files taxes on his photography income and is willing to keep a careful record of income and expenses, paying for the car over a period of years could be a smart choice. The income he gets from professional photography may be offset by the cost of a business-owned car used for Big Bend or similar expeditions over a number of years.
Many businesses decide that leasing is attractive because the costs are straightforwardly expendable and offset business income. This scenario is worth running by your tax preparer, but with $7,000 in taxable photography income per year I could imagine it would be worthwhile to purchase the car and pay for it over the long run rather than with cash upfront. Your tax preparer could give you guidelines about mileage, depreciation and personal versus business usage, and keep you on the correct side of IRS rules.
Q: When considering refinancing a mortgage, how
should one think about and compare an existing mortgage rate to a new one since the existing mortgage has interest weighted at the beginning of the term?
Oliver C., Medford, Massachusetts
Q: A provocative question: Why would any U.S. homeowner ever pay down a mortgage? Assuming a responsible person with a positive net worth and sufficient liquidity to navigate risk/market fluctuations, why would you not hold permanent interest
only mortgage debt until your estate settles the debt at your death? We have a recurring family debate on Thanksgivings and other major holidays about whether financial leverage creates or destroys value as you can, over time, almost certainly earn a greater post-tax return on deploying that marginal dollar elsewhere. Baffles me.
A: I paired these questions because they illustrate that for high-earning, high-wealth households, a mortgage is not a burden so much as it is a financial tool. Higher earners seek to maximize their mortgage interest income tax deductibility, and they seek to maximize their amount of debt — or “leverage,” in finance lingo — all the better to make money elsewhere. For them, the traditional Dave Ramsey personal finance school of thought to reduce your debts at all moments is misguided.
The difference, of course, is that debt for low earners or habitually overly indebted people is a crushing burden. Debt for high earners — or in Matthew’s breezy finance lingo “a responsible person with a positive net worth and sufficient liquidity to navigate risk/market fluctuations” — is an opportunity.
The right thing to do with mortgage debt depends on which group you’re a part of.
To sort-of answer Oliver’s question: Nobody who got a mortgage more than a year ago is going to find it advantageous to refinance right now. Interest rates need to drop a lot from current levels. And it’s not a great idea to refinance just to increase interest as a portion of the monthly payment. That’s being too clever by half, even for a wealthy person.
To sort-of answer Matthew’s question: Yes, if you are very well-off, an interest-only prime mortgage is probably the right financial instrument.