Financing strategy

[NathanielHrnblwr]

I haven't had a car loan in over a decade and rates were significantly higher back then and bought cheaper cars too. What's the optimal financing strategy for purchasing a Tesla?

Option 1 - 100% financing with GAP insurance. Higher monthly payment, less risk if car is totaled/stolen. Underwater if selling at some point.
Option 2 - 20-30k down, no GAP. Lower monthly payment, possible risk of losing cash if car is totaled/stolen in the first year or two.

Am I overlooking pros or cons with either option? At 1.49%, it seems to make sense to finance as much as possible to keep cash on hand for other purchases that would not qualify for low rate financing such as home improvements. It just "feels" irresponsible to finance a high amount (Maybe I'm old...).

Thoughts? Likely there's no 'right' way and this is a personal decision. Curious what led you to your choice.

Thanks.

 

[RichardD]

Option 1, you aren't underwater since you still have the 20-30k if you needed it. Some of this does depend on your average time to own a car.
At 1.49% You are much better holding your money for the other things you want to do that would require a higher interest loan (home improvements etc).

 

[jaguar36]

I'm not sure what the cost of GAP insurance is, but speaking purely fiscally at 1.5% you would be best of financing as much as possible and then investing everything else. Of course you have to actually invest the 20-30k that you had to put down, and not go and spend it on something else.

 

[Red_DS]

What Richard said. Go with Option 1 and invest the downpayment.

 

[redan]

I'd go with Option 1, especially if the gap insurance is only $399. 1.49% almost feels like free money!

 

[andrewket]

I haven't had a car loan in over a decade and rates were significantly higher back then and bought cheaper cars too. What's the optimal financing strategy for purchasing a Tesla?

Option 1 - 100% financing with GAP insurance. Higher monthly payment, less risk if car is totaled/stolen. Underwater if selling at some point.
Option 2 - 20-30k down, no GAP. Lower monthly payment, possible risk of losing cash if car is totaled/stolen in the first year or two.

Am I overlooking pros or cons with either option? At 1.49%, it seems to make sense to finance as much as possible to keep cash on hand for other purchases that would not qualify for low rate financing such as home improvements. It just "feels" irresponsible to finance a high amount (Maybe I'm old...).

Thoughts? Likely there's no 'right' way and this is a personal decision. Curious what led you to your choice.

Thanks.

You should also consider "agreed value" insurance with your normal carrier. For a small premium they will pay you the purchase/replacement price of the vehicle.

 

[andrewket]

I'd go with Option 1, especially if the gap insurance is only $399. 1.49% almost feels like free money!

If you're looking at Alliant, be aware their GAP insurance will only covers loan up to $100k.

 

[democappy]

I will just echo what everyone else said. Option #1 unless you have some sort of strict personal code against paying interest. Financially, option #1 would be better for almost everyone assuming you aren't just going to throw away that $20k-$30k you were going to use on the down payment.

 

[RobertF]

Option 1, you aren't underwater since you still have the 20-30k if you needed it. Some of this does depend on your average time to own a car.
At 1.49% You are much better holding your money for the other things you want to do that would require a higher interest loan (home improvements etc).

Agree, but consider purchasing bonds or interest bearing stocks that yield more than 1.49% until you need the money for "other things". Also don't forget to consider using the money to pay off part of your mortgage or credit cards that cost you more than 1.49%

 

[NathanielHrnblwr]

It seems option 1 is the clear preference. Appreciate the quick feedback!

 

[NathanielHrnblwr]

Looks like rated went up overnight. 1.99% now from tesla.

 

[deonb]

Looks like rated went up overnight. 1.99% now from tesla.

Still. Take the money and invest in GM at 4.21%.

(duck)

 

[Mrwatchdawg]

option 2.

just because everyone said option 1.

personally, i just did option 1 when i bought mine, interest rate was 2.29. i was putting 40k down but than only put 13. Kept the other in the credit unions account where its financed.

 

[whttiger25]

I personally chose option 2 for several reasons.

1) I am about to purchase a home, and it is beneficial to have a lower car payment when looking for financing from banks.

2) I was looking to avoid paying for GAP insurance through my car insurance company.

3) Considering how well the stock market as done, I don't see clear investment opportunities at the current time, and am waiting (perhaps a very long time) for a significant dip in the market to increase my stock exposure. I'm still heavily invested in the market, but currently hold about 20% of my liquid net worth in cash/bonds/money markets. In the context of a car loan down payment, this is a marginal decision. If you have, say $30,000, and you are deciding whether or not to invest the money in the stock market or put it towards a car, then yes you should choose the higher returning asset. However, if you have a $100k cash allocation and you are waiting for the stock market to come down, then $30k into a car loan effectively earns you 2% vs what that cash is earning you.

So the decision has a lot to do with your current asset allocation. If you are "invested" in cash, then you should make a higher down payment, but if you are going to have to sell stocks that you like, or not buy stocks you want to buy, because of the car down payment, then you should minimize it.