Most people are looking to downsize and purchase less in retirement and certainly to take on as little debt as possible.
Yet there is a time and a place for new purchases and loans in your golden years. Financing a car might just be one of them, even if you have the cash to buy one outright. Experts explain why.
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Keep Your Money Working for You
In retirement, you want to be thinking about “opportunity cost” when it comes to your money, according to Christopher Adam, director at Woodside Credit, which specializes in collector car financing. In other words, keeping your money working for you.
“In a high-rate environment, assets are typically generating more money, which can be very disruptive to long-term wealth if cashed out,” he said.
Thus, pulling cash out of your retirement accounts or high-yield savings might not make sense if you need a new car. “Financing can minimize the amount of cash being moved around and provide stability in a financial portfolio.”
Of course, ideally retirees will want to look for the best loan terms possible and not leap too quickly.
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Tax Advantages
There are even some tax advantages to financing a car, Adam said. One comes from the auto loan interest deduction provision inside the recently signed One Big Beautiful Bill Act (OBBBA). According to the law, retirees could write off up to $10,000 per year in interest on qualifying vehicles (new vehicles only, cars must be assembled in the U.S. and other stipulations apply). This deduction will only apply from 2025 to 2028 unless further legislation is passed to extend it, however.
Another tax consideration is that withdrawing a sum of money from an account like a 401(k) to pay for a car in full can be counted as taxable income, Adam said, “potentially causing a push into a higher tax bracket.” Financing a vehicle can get around this issue.
Shop Around
While a loan may be a good idea, it’s still important to “shop around and crunch numbers,” Adam urged.
He even recommended using resources like AI to help understand the full financial impact from different choices. “It can be time-efficient to run cash-flow projections, evaluate risk and opportunities, making it easier to conclude what strategy makes the most sense,” he said.
The Simpler the Better
While financing may be the right plan, keep loans simple, said Alex Black, the CMO of EpicVIN. Go for short-term loans, like three to five years, with a good down payment (at least 20%) and a fixed rate. “Do not allow balloon payments or long-time payments.”
Before You Finance
Adam urged any retirees who are thinking of buying a car to be clear about their current income streams and cash flows, and not to finance a car that’s out of their budget, either.
“Rule of thumb: If a car payment consumes more than 10% to 15% of monthly income, it’s likely not suitable,” he said.
As with all financial decisions in retirement, don’t wing it, but talk with your financial planner or advisor, Black urged. “Go over cash flow, savings goals and future big expenses. A car loan needs to fit easily into your budget without upsetting the big picture.”
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This article originally appeared on GOBankingRates.com: The Surprising Reason Retirees Shouldn’t Pay Cash for a Car
