Sorry for this off topic question but sort of (ok, barely) tri related. As consolidation for “letting” me do IM CDA this summer, I have agreed with lovely wife to buy her a new car. She wants an Acura TL. My question has to do with financing. I can either get fixed rate car loan for about 4.5% or just access my home equity line of credit which presently sits at 6% (and rising lately). Since I understand the LOC interest is tax deductible, am I better off using that even with a higher rate? Is there a general rule for calculating the net/effective rate of a LOC rate so I can really compare the two? Thanks!!
Depends on your marginal tax rate. The formula is (1-Marginal Tax Rate) * Interest Rate. If your marginal tax rate is 25%, the LOC loan would cost (1-.25)*.06 or 4.5%.
Keep in mind with the LOC that you’re using your house as collateral for a car loan. Also keep in mind that you have to be itemizing your taxes in order to take advantage of the ‘savings’.
all depends on your tax rate, whether or not you can itemize and whether or not you are getting deductions phased out because you make “too much”.
all things being equal, 6% x 25% tax rate = 4.5%
Let me state the obvious first; you are always better off not financing a depreciating asset. Ok now that that is out of the way; the answer is, it depends. It depends on several things, not the least of which is most home equity lines of credit (HELOC) are tied to prime+, meaning they are variable. If you have a fixed rate HELOC you will most likely be paying more than 6%. Now that said if you have the self-discipline to actually make the principle and interst payments on the same schedule as a fixed loan you will probably be better off with the HELOC since it is tax deductible, assuming you need or can take advantage of the extra deduction.
Technical is correct, Not that he needs me to state that.
One other thing to think about is that if you use the LOC for the car, you will not have that LOC funds available for something else. So all even if your Marginal Tax Rate is 25% or close to that I would go with the financing from the dealer. Then you would still have the LOC available if something else like a carbon P3 with powertap and race wheels came along ;-).
Also car dealers have various sources of lending available to them and you may be able to get the financing lower from the dealer.
Good Luck,
RF
Ya, finance the car from the dealer, and the bike from your home line of credit, pay interest on both of them. Be like the rest of America make a buck and spend two…
Thanks for the great advice. I realize using a long term debt instrument (LOC) for a depreciated asset like a car is kinda lame but we are very anal and won’t let it drag out more than 3-5 years.
After she gets her new car I will start planting the seed for that new road bike I want! (tri bike is just fine as is) I promise to pay cash however…
If she drives less than 12,000 miles a year and keeps good care of her cars, I would lease. You’ll be better off than financing in my opinion. After a couple years she’ll probably want another car anyway, just like we all want new bikes every year.
Sure your LOC has tax advantages BUT as one of my profs in b-school said… never finance an asset for a duration longer than its expected life. If you use the LOC for the car I will bet you that you still have the debt after the car is gone. See it happen all the time.
“i can either get fixed rate car loan for about 4.5% or just access my home equity line of credit which presently sits at 6% (and rising lately).”
above and beyond the obvious good answers already given, what about the financing alternatives at honda? nothing good there?
If you are so anal and plan on not letting it drag out for so long, I would go ahead and finance it through the dealer with the 4.5% financing. Try to talk them down a bit as well. The 4.5% is locked, while the LOC APR is variable. Since from the tone of your post, you plan on paying it off early anyways, go ahead with the car loan since there usually isn’t a prepayment penalty. Also, make sure you put ~20% down on it though so that you won’t be upside down on the note once you drive it off the lot.
Thanks.
Great car.
Finance it but don’t accept the rate they offer and you might check around some. Dealers and points to the finance rate.
Shop for a low mileage two year old Honda and save the hit for two years of Depreciation expense. Then take your wife on nice trip to Kona when you qualify, and you will still have money left over.
Let me state the obvious first; you are always better off not financing a depreciating asset.
…unless the opportunity cost of the cash is greater than the loan rate. Depreciating or not, if you can get a CD at a higher % than a finance teaser rate, and pay it off in less than the length of the teaser rate, you should finance. Not saying those opportunities are out there around every corner, just qualifying the “always.”
Better yet, just buy a new Honda as the low mileage ones don’t go down in price much. Get the EX V-6 and you will have a faster car than the TL and save maybe $10K. The only thing you will be missing is the quiet serenity of an Acura ride.
Assuming the LOC is variable…definitely wouldn’t utilize that. Pretty likely that the Fed will keep raising rates at a 200 to 300 basis points a year, which means you’ll likely be paying closer to 8% or 9% next year. Probably will go up a little more afterwards. If your LOC goes up to 9%, you need a marignal tax rate of 50% to get you back down to 4.5%. Not likely. Go with the 4.5% fixed.
On another note, I had a 2002 TL and loved it. Had a nice bike rack for it too…
Agree with Matt. Rates are only going up for the next year so the LoC will definitely hit you hard. Take the fixed rate, although you might shop around to lower it.
But as others have said, be wary of any loan where the term of it will exceed the depreciable life of the car - never want to be in that situation.
Will the wife be happy with a slightly used TL? 'Cause that 1st year of depreciation is what really kills the #'s when you’re financing…