Auto Loans, Leases and Financing – Ep. 234

Welcome to the Accumulating Wealth podcast. I’m Judson Crawford. And I’m Hunter Satterfield. We are CPAs, wealth advisors, and partners at CWA, a financial services firm here to help business owners navigate the decisions they face every day. Yeah, and if you’ve purchased a car recently or are planning to, you know there are way more decisions that go into the buying process besides deciding if you need a heated steering wheel or third-row seats. 

That’s right. We’re talking about down payments, monthly payments, financing versus cash. Yep, and honestly, a lot of this applies to any big purchase, so let’s get going. 

All right, listeners, we’re excited about today. I think this one just kind of grew organically, talking about cars, because Judson, both you and I have recently purchased automobiles. Heck, I’ve purchased two: one for my 18-year-old going off to college, and one for my wife. Mine was last year, though, so. 

Okay, yeah, not bad. And then we’re, man, we’re getting a ton of clients that are asking right now, too. I had just three alone last week, which is why we wanted to kind of talk through it. Well, there’s a lot of talk around cars, and we’re going to go over some of the stats, but the most recent, I guess, somewhat rush to buy a car is the unknown of where costs will go from here with tariffs. 

For sure. Yeah, and but before we get to that, two interesting things, Judson, that I saw this week, both related to China, that are just sort of interesting. The first is a deal that basically is… So obviously we know during COVID that a lot of our medical supplies, our medicine, comes from China, and this stat came up that I saw last week. 

So it’s basically the share of pharmaceutical drug imports that come from China. This is just eye-popping. 95% of our ibuprofen comes from China. Wow. 95%. Okay. I mean, thankfully, it sounds like we’ve got, we definitely have at least a bit of a pause right now on the Chinese tariffs, but yeah, if not, we’re going to have some headaches. 

90 days. We like to do things in 90-day increments. Do you think this is going to be like TP, where people go buy all the ibuprofen up, probably so. Just in case? There will be a run on something. There’s no doubt. 70% of acetaminophen comes from China. 91% of hydrocortisone. We’re going to be itchy and have headaches. 

It’s going to be bad. Stay away from the poison ivy, folks. That’s right. Wait. No. Hydrocortisone for poison ivy? Isn’t that right? I think it’s like, you have to have specific poison ivy medicine for that. Oh, okay. I think. I don’t know. I don’t really get that. 45% of penicillin. That one seems maybe bad. 

The others, we’re just going to have headaches and itchies. Okay, and this is over-the-counter stuff. Correct. Yeah. So it’d be interesting to know what prescription drugs would be. Well, I don’t have those stats for you. No, I’d just be interested in it. I’m sorry. It would be interesting. 

Just or my own- Thanks for saying that. Listeners, make sure and send the link to those numbers. All right, next one. This one, it really surprised me. So the article from Apollo Global Management says, “When you buy a new t-shirt in Manhattan, some of the money goes to the manufacturer in China, and some of the money goes to the US company that sells the shirt.” 

Okay. I believe that. So they basically went through and looked at- so the distribution of expenditures on imports from China, 56% of the money actually stays here. Yeah. 44% goes home, which that was more than I thought. I would have assumed much more went back home. Back to China, sorry. Back to China. 

Yeah, you don’t live there. Yet. But life goals. Yeah. Right? I’m just going to go pop a tent on the wall. Is that allowed? I agree with you. I would not have assumed that over half stayed with the individual.  

But this explains a lot, because one of my big questions in life is when you go to a really nice tourist location, okay? So, like, in Malibu, California, in the main town center, which is not low rent, there’s still one of those fricking t-shirt shops that has the same t-shirt that you can buy on Venice Beach and everywhere else, and I’m always like, “How do they even pay their rent?” 

Every Colorado mountain town? Every Colorado mountain town. Yeah, so I guess they’re- And it’s because they’re keeping 56%. 56%. So here’s what I expected in- Let’s start a t-shirt shop with Accumulating Wealth podcast merch. Yeah. For stuff that is sourced from Europe, actually 82% goes back to Europe. That’s what I expected. Yeah. So only 18%. I did the math very quickly, 18% stays here. Those Europeans are selfish I tell you. Expensive t-shirts. Yeah. They’re probably higher quality.  

So anyway, fun way to start, as always, but let’s get to the meat of everything. And we’re going to cover a lot of things here, folks. 

First, I think we’re going to start with some stats, which I think both of us were… They’re certainly intriguing. But then we’re going to talk through, like, do I buy? Do I lease? Do I finance? What are the tax implications if I finance versus lease? And all those different types of things. And so I think, Judson, maybe the most interesting place to start here is this chart that we both saw and it’s just sort of eye-popping. 

And basically it’s a picture of the United States, everyone, and on it, it basically says what percent of state residents are paying more than $1,000 per month for their car payment. And it stuck out to you and I, Judson, because Texas is the leader in the clubhouse. Well, I guess we’re right behind- Yeah, it was one right behind Alaska, where cars are, like, 20% more because it takes a boatload, literally, to get up there.  

So actually, sidebar, I have some Alaska clients, as do you. If y’all are wondering, listeners, if you live in Alaska, if you’re going to get a car, there’s really only two ways. One, you buy it there, and it has either gotten there by a boat or driven through the Canadian Yukon. Yep. Or you fly down to the States, buy one, and drive it through the Canadian Yukon for, like, 20 hours. It’s true. This is why they’re more expensive there.  

Anyway… What is the number here? 25.5% of Texas residents are paying more than $1,000 a month. I believe it. What are we doing? Buying big trucks. I mean, honestly, if you look at the states that are above 20%, they are truck states. Can you list those off for us, Judson? Well, the highest is Alaska, Texas, Idaho, and Montana. No, that’s North Dakota. That is not Montana. That is North Dakota. 

Those are the very highest. But if you look along kind of the Midwest, the southern states, Colorado, New Mexico, Nevada, Arizona, all of those, I would say, are above 20% and are, I’d say, truck states. Yeah. Well, I totally agree. And I mean, I think this comes along… We’re going to talk here in a second about what’s driving so much of these payments to be higher. Get it? Driving. Ah. I did that on purpose. Not really.  

But I mean, I think just before we get there, most- You’re right, Judson. Most of the Midwest or the maybe what traditional Midwest, right, and then the Northeast are all in, like, the 12% to 15% range of residents are paying more than $1,000. And I’m assuming they’re going to be smaller commuter-type vehicles. Some people don’t have any, right? Yep. Because they’re using public transportation, whatever else it is.  

It looks like Connecticut is the winner. Is that right? 11.4%. Yeah, looks like it. I think that’s where the arrow’s pointing. But regardless, still, I mean, basically across the country you’re talking about 12% or more of folks- Oh, wait, no. 

The one floating down there beneath Florida is the winner. Oh my gosh, I did not see that down there. All right, Puerto Rico’s down there with 10.6%. You’re right. But I think a big takeaway here, Judson, is that is, I think especially if you put yourself in a time capsule back in 2000 and popped out now, to think that over 20% of the United States is paying more than $1,000 a month is just, it’s crazy. 

My first new car, and I want to know if you remember yours, my first new car was a new Chevy Trailblazer, okay? I remember that. It was when I was working at Ernst & Young. It was $33,000, and I thought, “This is, this may be the most expensive car I’ll ever buy.” That’s literally what went through my head, right? 

And now you can’t get anything for $33,000 new. You can. You probably wouldn’t want to drive it. That’s true. Yeah. That’s true. Well, and- Wait, what was yours? What was your first car purchase? That Carrie and I bought? Well, first new car purchase. That we bought instead of like my parents helping me? Yeah.  

It was Carrie’s Acura TSX. It was the first year of that model, and we paid- I tried to negotiate with the guy, and he goes, “There were 10,000 of these produced for the United States. I’m not negotiating.” I was like, “Okay, you win.” I was fresh off a negotiations class in graduate school. And I was like, “I’m going to win this.” 

I lost very badly. I didn’t even get any free car washes. $24,000, and I was like, “I cannot believe we’re paying $24,000 for this car.” Exactly. And now, I mean, the reality is that if you want a full-sized car or you need a third row or a truck, I mean, it’s hard to get one for, if it’s not $75,000+, if not closer to $100,000 these days. 

Yeah. Well, and the average price for a new F-150 is $50,000 okay? And that doesn’t include all the crazy stuff, right? So folks, if you want to figure out how do you get to the $1,000, $50,000 financed over 48 months, four years, at a reasonable interest rate is $1,200 a month. Yep. Financed over 60 months is $1,000 a month. 

I mean, so this is just what they are. Yep. I mean, it really comes down to the fact that rates are a little bit higher. Most cars are going to be in the $50,000 range, and people are financing four, five years. And so we’ll get through to, like, what should I be financing or whatever else it is. So a few more stats here. 

Average cost of a new vehicle in the US is up 22% since COVID. I think, Judson, I mean, there’s a couple reasons why, right? So they’re lasting longer than ever as far as, like, the car. People are not keeping them longer, but the actual automobile is lasting longer than ever. Tons of technology. We both have bought new cars recently. 

I mean, just- They’re computers on wheels. So a ton of technology, and then I think also just broadly, things cost more because inflation’s a thing, right? That’s right. So you put all those things together, and yeah, an F-150 costs $50,000, whereas when you and I graduated high school or college, those were $18,000 to $20,000 trucks, so. 100%.  

And clients, for those of you out there that are my clients and that are buying their trucks, you can get an F-150 for $50,000. Stop lying to me. Well, and again, I think that’s the $1,000 I guess is when we both saw it originally, we were like, “Holy cow, like 25% of Texans are paying more than that.” 

But then you start to actually get down to it, you’re like, “Okay, well-” It makes sense. I mean, in all honesty, it makes sense with the price of cars. Because most people don’t or don’t want to put 50% down on a car. Yeah.  

So average car is, again, on the road for 12 years. It certainly changes hands. The average ownership is right around five years. So about 2/3 of households are keeping them for about five years, which seems right based on our clients’ experience. Well, what does it say? Less than five years. The average ownership is, for two-thirds of households, is less than five years. Yeah.  

So I mean, I think that to me makes sense, broadly speaking. Average rates right now are 3% to 7%. It just kind of depends on what you’re buying and what the state is and how long you’re financing it and things like that. Well, and if you’re getting on the lower end of that, it’s typically like a dealer program. 

It’s like, “Hey, right now we’re offering this 3% deal,” right? Because if you go out and you look at the open market at car loans, going to a credit union, going to Bank of America, whatever it is, you’re probably looking at 7%+. Yeah. No, for sure.  

As far as auto loans in delinquency, so this would be if it’s 90 days delinquent. So it looks like, Judson, it’s right around, as of Q1, about 5% of auto loans are delinquent. Compare that to credit cards, which are bumping up against 13%, student loans, which are bumping up against 10%. So, and mortgages, which are only about 1%. So it’s kind of in between mortgages and student loans and credit cards as far as delinquency rate right now. 

It’s amazing how student loans went to almost zero delinquency for quite a while. Isn’t that? Isn’t that weird? Yeah, and then they said, “Hey, you need to start paying these again.” That’s right.  

So, I mean, look, folks, I think those are some good stats and it maybe helps frame a little bit about kind of why, so where things are across the country and potentially a little bit on why. 

Now, I think, Judson, there’s a couple things to cover. First, let’s just get taxes out of the way, because everybody always asks like, “Hey, if I lease, if I buy, if I finance…” Really, there are only two tax scenarios. I will frame them out and then let you talk about them. There is- for taxes, if you lease, it’s treated one way, and if you purchase, whether you finance, pay cash, put a down payment, it does not matter, it’s treated another way. 

So those are the two ways. You want to talk about how each of them are treated for taxes? Yeah, and I would say, again, for most of my clients, we’re dealing more with the purchase side, so I’ll start there. So if you purchase the car and you claim it as a business deduction, at least 50%, you have to claim 50%, then you get to write off the car, depreciate it like a piece of equipment. 

And you can, again, the business percentage that you claim is the percentage of the automobile purchase you can write off, right? Okay? Does not matter. Any car you purchase, if you put it on the business, you can take that depreciation. Now, the way that you can take that depreciation varies based on the size of the car. 

So if you buy a car that is 6,000 pounds or over, you have the option of taking Section 179, which means accelerating that depreciation all the way to the first year, or you can take it over five years Instead of taking it all at once. If your car is under 6,000 pounds, you still get the same dollar of deductions, you just can’t take 179, so you write it off over five years. 

So, as I tell my clients, like, don’t buy a car just because it’s over 6,000 pounds to take the 179. You’re getting the same deduction, right? It’s just over a period of time. In a lease scenario, you can write off the actual lease payment, so you don’t get a depreciation. You write off the lease payments, and it’s still subject to a business percentage use, right? 

So both can be favorable as deductions in the business, but I think that this whole lease versus buy thing, it’s a conversation I’ve had with tons of clients. How do you approach that?  

Yeah, I think the answer that I always give clients is sort of a line in the sand, which is four years, right? And I mean, again, look, if you were going to say, “Hey, I’m going to keep it four and a half years,” okay, fine, whatever. Reasonably, though, if you’re going to keep a car less than four years, you probably ought to lease it, right? If you can limit your miles to what you can get under the lease, right? Exactly. Because that can also cost you terribly. Exactly.  

If you’re going to keep it longer than four years, then it probably makes sense to buy it, and there’s a whole lot of reasons why it comes down to taxes and financing and resale rates, but everything we’ve always looked at, that four-year mark is a pretty comfortable one, and it’s a really good line in the sand as far as, hey, should I lease or buy? 

If I’m going to be trading this thing in every two to three years because I want the new, fun model or I don’t want to deal with the issues with repairs and maintenance and stuff like that, then lease it. Yeah. If you’re going to keep it longer than that and you are ready to put money into it ongoing, then buy it Yeah, and you could probably use, to a degree, you could probably use that same rationale, not only from a standpoint of what makes more sense financially, but also from a pure depreciation standpoint in your business as well. 

Because if you buy, let’s say you buy a truck for $100,000 and you’re like, “Man, I’m going to Section 179 this thing,” you write it all off in year one, okay? And then three years later, you sell it and you get $70,000 for it. Guess what? That $70,000 is a gain, right? Because you’ve written off the asset. So that is something you have to think about when you’re writing your car off in the business is that there likely will be a gain on the sale, so that’s why you buy another car and you put it on there, and then you just start the whole thing. It’s a spiral. It is. It’s the car spiral. It’s right. Yeah. That’s a new thing we’re going to teach on. Add that to education.  

Listeners, let me just put another pin. Judson explained it well, but another pin very quickly. If you are going to purchase it and you want to write it off in the business, it does not matter if you pay cash or finance. So I’m going to just say that again. It also doesn’t matter if it’s new or used, if it’s new to you. Correct. Yeah, so just get that out there, folks, because that’s a question we get all the time.  

Okay, let’s talk about, let’s assume you’re not going to lease. Let’s assume you are going to purchase. Let’s talk about, “Hey, do I finance, and if so, how long do I finance over?” 

I think the do you finance comes down right now probably most acutely to what is the rate. I think, look, if we have the ability to get 4%+ percent in cash reserves right now, if you can secure a loan that’s under that, then it makes sense to finance, especially because these loans don’t have prepayment penalties, so you can always pay them off, with no issues. 

So I think that, to me, is the first sort of decision point is what’s the interest rate going to be? I think there’s a, like sort of an ancillary one of, hey, if you’re getting a car that is very popular or you’re getting a car maybe on a third market type situation, it’s like, “Hey, the only way I can secure this is to buy it,” then just buy it with cash, right? 

Don’t worry about financing, and you may need to use a line of credit or a home equity line of credit or something like that to do so, but if there is an opportunity cost to you not even being able to get it, at which point I would say to just pay cash as well.  

I think every scenario over 4%, 5% interest, it really comes down to a cash flow thing. Like, if you have the cash sitting in accounts, you’re meeting all of your investment goals, and you say, “Hey Judson, I just want to buy this because I don’t want to pay 6% interest and I’m saving everything I need to. I’m hitting my 401(k) savings. I’m hitting my IRA. I’m hitting my personal savings,” then I think generally we’re going to say, “Hey, just pay cash for it.” 

Yeah, 100%. And again, we’re going to disagree if- well, not disagree because if you have all of those things checked off and you, want to use cash, we’re not going to force you to take a loan. But if you do run across a dealer that is giving a special rate, the 1.99%, the 2.99%, probably don’t want to do that. 

All right, so let’s talk about how long you finance over it. Now again, some of it is going to be directed on, hey, what’s my rate? So if they say, “Hey, if you’re at 48 months or under, we’re going to give you 3%. If you go to 48 months or over, it’s now 6%,” well, then you have your answer, right? But let’s say that broadly the rates are pretty much the same between 36 months and 84 months I thought this stat was interesting, and we can’t get all the data because we don’t belong to autonews.com. Shame on you, autonews.com. I’m shaming you right now.  

But we did get the teaser piece of it, that 20% of new car loans are financed at 84 months or longer, which was really surprising to me. Agree. That is a scary proposition in my eyes. I would always tell a client to be under 60 months. Assuming the rate’s not going to be crazy. 

And I think that 60 months is coming into the depreciation tables too, right? Like, if the IRS is saying this asset’s fully depreciated within the first five years, it’s probably lost so much of its value, you do not want to have debt longer than 48 to 60 months. What do you say? Yeah, 100%. I think there are two things that come to mind on this. 

Number one, I don’t think it’s a great thing if you are extending the loan out to 84 months just to afford it, right? Because that probably means you’re buying too much of a car. Secondarily, I think that it’s going to leave people- again, this combination of the fact that most people don’t keep their cars for a full five years and that the 84-month loans are growing is just going to lead to more people being underwater. 

I mean, so unless you are dead set and committed to driving this thing for six to seven years, don’t finance it over that long. Yeah, I love the 60-month number too because that’s oftentimes when warranties are up. Yep. And so it’s like okay, now you might begin to incur some costs related to repairs and maintenance. 

Depending upon what type of car it is, you may have some big bills. $1,000 here, $1,500 here. Your tires are running thin, so that’s going to be $1,200, whatever the number is. And so if you don’t have that monthly payment, you can keep that monthly payment in your budget, but use that for repairs and maintenance and other things to the car. 

So let’s talk personal experiences. The two I bought recently, the first was for my 18-year-old, and we gave him a budget and said, “Hey, look, like, here’s your budget. This is the only car we’re ever going to buy for you. So, be smart in what you buy because, you want this thing to extend well past your college experience or wherever else it is.” 

And so we had that cash set aside. We had been saving it. I think that’s a very good way to sort of, if you want to send your kid off with something, that’s a really good way to do it. He ended up incidentally spending a little bit more and using some money he had saved over the years from his working to buy what he wanted, smartly. 

Kudos to Ronnie here. He bought a Toyota 4Runner because he’s like, “Hey, that’s going to get me 150,000 miles.” I’m like, “You bet.” And it was a used one, and so he got a great fit there. So we paid cash for that because we had saved for it. For Carrie, we recently had to replace her Suburban. She got to shrink down in cars as we’re sending one off. 

She’s excited about that. So she ended up getting a smaller sized SUV. Well, the Suburban still had a little bit of value, so by the time we traded it in and got what we wanted on the Lexus, it was also a very affordable thing, and it allowed us to get what is a popular car right now very quickly and easily, so we just used cash. 

And again, that’s something, we’d had the Suburban for eight years, so we had been able to begin stashing cash for that next purchase. So that was our personal experience. Just some things, listeners, for you to think through as you might be approaching your next auto purchase. I bought my last car last June, and did it over 84 months at 10%, and, I’m having a hard time trading in right now. And you’re paying interest only right now? I’m paying interest only right now. Super smart.  

So, again, folks, as we wrap up, I think that’s some helpful framing for the auto questions that are arising right now. Now, as we mentioned in the teaser, this kind of spills over to really any purchase that you might have in your business, right? 

We get these questions all the time about an X-ray unit or some furniture or some other equipment that you might need at your business, computers. It comes down to lease or buy. It’s a very similar question. Finance, how long do I finance over? I mean, all of these things are just tried and true rules. 

The depreciation is the exact same. If you’re leasing computers, you’re going to depreciate it as you pay the payments, or you’re going to deduct it as you pay the payments. If you’re purchasing, you’re going to deduct it right there. And it doesn’t matter if you finance or if you pay cash. It’s still the same tax treatment. 

So all those things seem true, and a lot of what we’ve said here related to cars can be overlaid into other purchases in your business. 100%. Before we move on, though, because I don’t want to get too far away from the Ronnie discussion, because we can tease the fact that in two weeks from today, basically Ronnie Satterfield is going to be on this podcast. He is. He does not know it. He doesn’t? But he is. No, he doesn’t. That’s fantastic. Yeah. Are you just going to bring him up? We’re going to bring him up. He has no idea.  

So we’re going to… Folks, two weeks from now, as Judson said, is our Accumulating Wealth seminar, which is here at our office. Public service announcement, it is sold out. Sold out. Yep. That’s right. So- We sold it out … sign up early next year, people. Yeah, we are going to have it here in office. We are going to have my son as a graduating high school senior, and then we are going to pull from the crowd a graduating college senior. We’re going to pull them both up here, and we’re going to ask them all kinds of fun questions, which will be awesome. 

And when we go live with that one, we are going to go live with registration for 2026, and it will sell out as well, so you want to make sure and get your kiddos signed up for that. We’ll have dates and everything for that. But he’s super pumped about jumping in, so- It’s going to be fun. Get us out of here. Even though he doesn’t know about it. 

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