I need a new car. What’s the best way to pay?

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Q. I need a new car and it will cost around $ 32,000. I have $ 25,000 in cash. Should I use the money and take out a small car loan or use the equity in my home? Or what combination? I have good credit so it shouldn’t be difficult to get a loan.

– Borrower

A. It’s hard work to find a new car these days because a shortage of semiconductor chips is hurting supply.

But if you find the wheels you want, several factors come into play here.

Keep in mind that the specifics of your financial situation and your goals should impact your decision, but here’s what you should consider.

When deciding to use cash or take out a loan for a purchase, you need to consider the opportunity cost of your decision, said Deva Panambur, paid planner at Sarsi, LLC in western New York and professor. personal finance assistant. at Montclair State University.

You said you had $ 25,000 on hand.

Ask yourself: If you weren’t using the money to buy the car, what would you do with it? How does the cost of the loan compare to the return you would get if you had to invest the money?

Also, do your financial and cash flow situation allow you to take on more debt, and is your credit rating good enough to get a relatively inexpensive loan?

“Not all factors are objective, there are subjective issues to consider,” Panambur said. “For example, some people don’t like to take on more debt and others will want to use the money to create an emergency fund for people I don’t have.

In general, he said he doesn’t recommend taking out a home equity loan unless it’s to improve your home because you never want to be burdened with debt on your home.

There are a few other reasons for this recommendation, he said.

“The interest rate on a home equity loan will likely be higher than the interest rate on a mortgage, because a home equity loan is usually a second loan on your home,” he said. declared. “It could also be higher than the interest rate on your car loan, especially if you are buying a new car from a dealership. “

Also consider that the Tax Cuts and Jobs Act of 2017 limited the tax deductibility of interest on home equity loans only if the loan is used to “buy, build or significantly improve the home of the taxpayer who guarantees the loan, ”he said.

So, if you are using the loan proceeds to buy a car, the interest on your loan is not deductible, just as the interest on your car loan is not deductible.

While you haven’t asked this question specifically, you’ll also want to decide whether to buy a new car or a used car.

“Usually, if you plan for the long term and aren’t particularly interested in driving a new car, buying a used car is more profitable because cars depreciate quickly over the first few years. years, ”said Panambur. Therefore, a used car has more “mechanical value” than the price suggests. “

“However, due to the unusual dynamics of the auto market, for some brands of cars new cars may be more profitable than used cars,” he said. “These dynamics also impact the buy versus lease equation, so you’ll need to do your research before making your decision.”

Email your questions to [email protected].

Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly electronic newsletter.



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