Buying a new vehicle is a major financial decision. Whether you're planning road trips to the Okanagan or need a reliable city car, one key question remains: should you pay cash or finance?
"There are pros and cons to both options," says Dave Lee, Senior Wealth Advisor at Scotia Wealth Management in White Rock. "The right choice depends on your financial situation and long-term goals."
Paying cash
For retirees with strong savings or investments, paying cash can be appealing, especially for those prioritizing a debt-free lifestyle.
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No interest payments: Keep more money in your pocket.
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No monthly bills: Protect your retirement budget.
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Better negotiating power: Dealerships sometimes offer cash discounts.
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Peace of mind: No future financial obligations.
However, withdrawing a large sum may not always be wise. If your investments yield strong returns, pulling cash could cost more in lost earnings than you’d save on loan interest. It might also trigger tax consequences, especially if you're pulling funds from a Registered Retirement Savings Plan (RRSP).
"Paying cash is the most conservative option,” according to Dave. “However, it’s important to consider the negative consequences of triggering capital gains, or increased taxes that may apply when withdrawing from certain types of investment plans."
Financing
Even if you can afford to pay cash, financing can be a smarter move, especially when interest rates are low, and your investments are performing well.
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Preserve investments: If your portfolio earns more than the loan interest, keeping money invested may be beneficial.
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Low-interest advantage: If you secure a competitive rate, financing can be cost-effective.
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Spread out costs: Free up funds for travel, home upgrades, or other goals.
Another option? A line of credit may offer better interest rates than dealership financing.
"Financing can be a strategic move for those who want to keep assets growing while still enjoying a new vehicle," Dave adds. "The downside? Monthly payments increase fixed expenses and taking on debt isn’t comfortable for everyone."
Making the right choice
When deciding between cash and financing, consider:
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Investment returns: If your portfolio outperforms loan interest, financing may be the better choice.
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Tax implications: Carefully consider the tax impact of your decisions.
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Cash flow: Know what monthly payments you can comfortably manage.
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Long-term goals: Keeping more cash on hand may offer greater financial flexibility.
"While cash purchases often make sense, the best choice depends on your goals and overall financial picture," Dave says. "Before making any major financial decision, it's important to consult with a professional who can assess your unique situation, help you understand potential tax implications and ensure your choice aligns with your long-term financial goals."
For more information, contact Senior Wealth Advisor, Dave Lee CIM, CFP, FCSI, at Scotia Wealth Management in White Rock by email at dave.lee@scotiawealth.com or by phone 604-535-4743.
Read more from Dave Lee online at www.dave-lee.ca/publications