Accounting & Bookkeeping & Small Business Forum

[Mark in Baltimore]

Hi,

First time on this site today and first post. I am a small business person who has had my own business since 1992 and am incorporated. I am a Realtor in, of course, Baltimore and have been selling real estate for the past five years. I am having a good year in a down market and am growing my business.

This is probably a no-brainer question for you financial types, but it has me in a bit of a quandary. I'm looking for a different truck and am considering two types of vehicles. I now have a 2002 Sequoia that I can sell for around $8,000 in this market (Kelly Blue Book is $12,000 and I still owe $2500).

The first option is a used, 2007 Toyota Sequoia Limited 4x4 with around 25,000 miles for $35,000. The other is a new 2008 Sequoia Limited 4x4 with zero miles for $45,500. For the used 2007, I would put down $10,000 and finance $27,000 at 7% interest for 60 months to get a payment of $575. For my second option, a new 2008 Sequoia, I would not put anything down at 0% interest for 60 months and finance the entire amount to get a payment of $875 (current payment is $475) and put the $15,000 in a Wachovia seven month CD yielding 4%.) The third option is for me to put down $15,000 and finance $33,600 at 0% interest for 60 months to get a payment of $560. But my friends say it seems silly to put money down for an interest-free loan.

Keeping in mind the differences in depreciation between the used versus the new truck, which one is the better deal at the end of the loan term? I really prefer the older, 2007 Sequoia over the newer one but am wondering how silly is it to pay 7% interest for 60 months for a used car? Being self-employed and 100% commission, I am worried about a payment of $875 for the next five years, although I would have the $15,000 on the bank.

Some other complicating factors beyond what I'm left at the end of the loan term are, in no particular order:

-I make it a general rule to not buy a new vehicle because of the instantaneous depreciation. That said, I do have my own business and can write off the depreciation. Try as I might, I generally do not keep vehicles much past 110,000 miles.

-The new Sequoia has a smaller cargo area (WHY???). The 2008 Sequoia has a rear cargo area of 121,500 sq inches (45” wide x 75” long x 36” high), whereas the first gen Sequoia has a larger rear cargo area of 158,508 sq inches (51” wide x 74” long x 42” high). Since I haul stuff to alot, cargo area is pretty important to me.

-The cargo area is smaller because the new Sequoia has electrically folding middle and third row seats that drop into the floor, making the floor height higher than my current, first gen truck. In my 2002 Sequoia, I can delete the rear seats and avoid carying 100lbs of wasteful weight. With the new one, I have no choice but to carry a bunch of stupid motors that are going to break.

-The new Sequoia has a bigger engine than my current, 2002 Sequoia and will be a better tow vehicle. Because it is so much more powerful, naturally, it will get worse gas mileage.

-The new, 2008 Sequoia is the first year of the second generation Sequoias and would probably have some first year teething problems. The engine, new for the Sequoias, has been in production for 2007 for the Tundras. I would get a 100,000 mile powertrain warranty for $750.

-A 2007 Sequoia, as the last of the generation, would probably represent the most reliable of all of the Sequoias. Since it's under 36,000 miles, it would still have a bumper-to-bumper warranty and would carry a 6 year, 100,000 mile powertrain warranty.

-The new Sequoia has a ton of cheesy plastic stuff on the dash that is better suited to a mid-'90's Cavalier.

-The new Sequoia has nav, parking sonar and a back up camera, all great features. It is also supremely set up for people like me who work out of their cars and has a great laptop center console and room for lots of files. That said, I mostly work out of my Miata.

Thanks for any help on my decision!

[Richard Noot]

Mark in Baltimore wrote: Hi,

First time on this site today and first post. I am a small business person who has had my own business since 1992 and am incorporated. I am a Realtor in, of course, Baltimore and have been selling real estate for the past five years. I am having a good year in a down market and am growing my business.

This is probably a no-brainer question for you financial types, but it has me in a bit of a quandary. I'm looking for a different truck and am considering two types of vehicles. I now have a 2002 Sequoia that I can sell for around $8,000 in this market (Kelly Blue Book is $12,000 and I still owe $2500).

The first option is a used, 2007 Toyota Sequoia Limited 4x4 with around 25,000 miles for $35,000. The other is a new 2008 Sequoia Limited 4x4 with zero miles for $45,500. For the used 2007, I would put down $10,000 and finance $27,000 at 7% interest for 60 months to get a payment of $575. For my second option, a new 2008 Sequoia, I would not put anything down at 0% interest for 60 months and finance the entire amount to get a payment of $875 (current payment is $475) and put the $15,000 in a Wachovia seven month CD yielding 4%.) The third option is for me to put down $15,000 and finance $33,600 at 0% interest for 60 months to get a payment of $560. But my friends say it seems silly to put money down for an interest-free loan.

Keeping in mind the differences in depreciation between the used versus the new truck, which one is the better deal at the end of the loan term? I really prefer the older, 2007 Sequoia over the newer one but am wondering how silly is it to pay 7% interest for 60 months for a used car? Being self-employed and 100% commission, I am worried about a payment of $875 for the next five years, although I would have the $15,000 on the bank.

Some other complicating factors beyond what I'm left at the end of the loan term are, in no particular order:

-I make it a general rule to not buy a new vehicle because of the instantaneous depreciation. That said, I do have my own business and can write off the depreciation. Try as I might, I generally do not keep vehicles much past 110,000 miles.

-The new Sequoia has a smaller cargo area (WHY???). The 2008 Sequoia has a rear cargo area of 121,500 sq inches (45” wide x 75” long x 36” high), whereas the first gen Sequoia has a larger rear cargo area of 158,508 sq inches (51” wide x 74” long x 42” high). Since I haul stuff to alot, cargo area is pretty important to me.

-The cargo area is smaller because the new Sequoia has electrically folding middle and third row seats that drop into the floor, making the floor height higher than my current, first gen truck. In my 2002 Sequoia, I can delete the rear seats and avoid carying 100lbs of wasteful weight. With the new one, I have no choice but to carry a bunch of stupid motors that are going to break.

-The new Sequoia has a bigger engine than my current, 2002 Sequoia and will be a better tow vehicle. Because it is so much more powerful, naturally, it will get worse gas mileage.

-The new, 2008 Sequoia is the first year of the second generation Sequoias and would probably have some first year teething problems. The engine, new for the Sequoias, has been in production for 2007 for the Tundras. I would get a 100,000 mile powertrain warranty for $750.

-A 2007 Sequoia, as the last of the generation, would probably represent the most reliable of all of the Sequoias. Since it's under 36,000 miles, it would still have a bumper-to-bumper warranty and would carry a 6 year, 100,000 mile powertrain warranty.

-The new Sequoia has a ton of cheesy plastic stuff on the dash that is better suited to a mid-'90's Cavalier.

-The new Sequoia has nav, parking sonar and a back up camera, all great features. It is also supremely set up for people like me who work out of their cars and has a great laptop center console and room for lots of files. That said, I mostly work out of my Miata.

Thanks for any help on my decision! Try something novel. PAY CASH That is the best deal yet.

[Mark in Baltimore]

Thanks, Richard. Unfortunately, I don't have $35,000-$45,000 to pay cash for a truck. What's your opinion regarding the scenarios that I posed? Thanks.

[Richard Noot]

Mark in Baltimore wrote: Thanks, Richard. Unfortunately, I don't have $35,000-$45,000 to pay cash for a truck. What's your opinion regarding the scenarios that I posed? Thanks. I will answer that with your own words
but am wondering how silly is it to pay 7% interest for 60 months for a used car? Being self-employed and 100% commission, I am worried about a payment of $875 for the next five years, although I would have the $15,000 on the bank.

I have counseled couples and businesses on debt and have seen it all.
If anyone wants to be truly debt free one way is to give up their love affairs with a brand new vehicle. The last time I financed a new car was when I purchased a 1974 Ford for my wife as a Christmas present. The car is long gone, but I still have the wife. Tax savings are never 100%. In addition you are paying interest on an asset that loses up to 40% of its value in the first couple of years. A truck is only a means of transportation Put the savings to a better use like an SEP or 401K

[Mark in Baltimore]

Thanks, again, Richard. As my first post states, I am not in love with a new vehicle and have almost always owned used ones. In fact, a new Sequoia is not perfect for me. But it is the best option in terms of room, reliability and resale value. The only reason I am thinking of a different Sequoia is because my current 2002 Sequoia has been fairly unreliable.

[Richard Noot]

Mark in Baltimore wrote: Thanks, again, Richard. As my first post states, I am not in love with a new vehicle and have almost always owned used ones. In fact, a new Sequoia is not perfect for me. But it is the best option in terms of room, reliability and resale value. The only reason I am thinking of a different Sequoia is because my current 2002 Sequoia has been fairly unreliable.
Ok so your IN LOVE with a used car.

best option in terms of room- I am assuming you are not planning on living in your car

reliability- there are plent of reliable vehicles out there
resale value- the value of an asset for resale is on what a willing part is prepared to pay for it If a car is reliable (see above) why worry about resale.

I do not know your age but figure what it would cost you in opportunity cost by purchasing any one of these vehicles. I am willing to bet it is somewhere in the neighborhood of $200,000.00-$1,000,000.00

[jmac1]

Go with the older vehicle. It is only a year old so some other sucker took the first year hit on the vehicle. It only has 25,000 miles which is nothing for a Toyota.

Your payments over the life of the loan will be $44,500. If you choose the new one, it will be $52,500. Financially, it is almost always better to buy a used car.

[Mark in Baltimore]

jmac1 wrote: Go with the older vehicle. It is only a year old so some other sucker took the first year hit on the vehicle. It only has 25,000 miles which is nothing for a Toyota.

Your payments over the life of the loan will be $44,500. If you choose the new one, it will be $52,500. Financially, it is almost always better to buy a used car.

Thank you for your help. But won't the new one cost me $45,500, which is the purchase price of the truck? The interest is 0% with the new truck, so it won't cost more than the $45,500 price.

If the used one is $44,500, that is, in essence, part of the dilemma. For only $1,000 more, I can get a new one. I am not an accountant (clearly) and am just trying to figure out what is the best move to make. Despite what Richard thinks, I am not in love with either used or new. In fact, if I didn't have to haul cargo for my hobby, as well as people, I would not own a truck but would have a more fuel efficient sedan. Space does matter, as does reliability and, frankly, is not worth debating on this forum.

[Richard Noot]

Thank you for your help. But won't the new one cost me $45,500, which is the purchase price of the truck? The interest is 0% with the new truck, so it won't cost more than the $45,500 price.

Only if you qualify for 0%. Even if you do qualify they make money because you could of purchased it for much less thsn the $45.500.00 It works the smae way as appliance or furniture sales. They markup the item even greater than what they would normally charge and then tell you there is no interest charges until January of 2099.

[jmac1]

The way I calculated it to be $52,500 was I just took your word at $875 per month times 60 months. I may have misread what your terms were on the new vehicle.

[RobJ]

Mark,

Your math is not making sense to me at all.

Quote: The first option is a used, 2007 Toyota Sequoia Limited 4x4 with around 25,000 miles for $35,000. The other is a new 2008 Sequoia Limited 4x4 with zero miles for $45,500. For the used 2007, I would put down $10,000 and finance $27,000 at 7% interest for 60 months to get a payment of $575. For my second option, a new 2008 Sequoia, I would not put anything down at 0% interest for 60 months and finance the entire amount to get a payment of $875 (current payment is $475) and put the $15,000 in a Wachovia seven month CD yielding 4%.) The third option is for me to put down $15,000 and finance $33,600 at 0% interest for 60 months to get a payment of $560. But my friends say it seems silly to put money down for an interest-free loan.

Option 1 - used - if the purchase price is $35,000 and you put $10,000 down, wouldn't you be financing $25,000?

Option 2 - new - how is it that a vehicle costing $45,500 with 0% financing will result in a monthly payment of $875? If you multiply $875 by 60 months, the total cost is $52,500. I know you mentioned adding an extended warranty of $750, but that's still a far cry from $45,500.

Option 3 - I agree with your friend. It's not a wise financial choice for the reasons he gave.

I'll need help understanding the math before I can provide some sensible advice.

Rob

[Mark in Baltimore]

RobJ wrote: Mark,

Your math is not making sense to me at all.

Quote: The first option is a used, 2007 Toyota Sequoia Limited 4x4 with around 25,000 miles for $35,000. The other is a new 2008 Sequoia Limited 4x4 with zero miles for $45,500. For the used 2007, I would put down $10,000 and finance $27,000 at 7% interest for 60 months to get a payment of $575. For my second option, a new 2008 Sequoia, I would not put anything down at 0% interest for 60 months and finance the entire amount to get a payment of $875 (current payment is $475) and put the $15,000 in a Wachovia seven month CD yielding 4%.) The third option is for me to put down $15,000 and finance $33,600 at 0% interest for 60 months to get a payment of $560. But my friends say it seems silly to put money down for an interest-free loan.

Option 1 - used - if the purchase price is $35,000 and you put $10,000 down, wouldn't you be financing $25,000?

Option 2 - new - how is it that a vehicle costing $45,500 with 0% financing will result in a monthly payment of $875? If you multiply $875 by 60 months, the total cost is $52,500. I know you mentioned adding an extended warranty of $750, but that's still a far cry from $45,500.

Option 3 - I agree with your friend. It's not a wise financial choice for the reasons he gave.

I'll need help understanding the math before I can provide some sensible advice.

Rob

Thanks, Rob. Option 1 includes taxes and tags. Maryland has 6% sales tax, so with tags, the price would be very close to $27,000.

Regarding option 2, yeah, you're right, my math is screwed up. For a $45,500 truck, taxes would be $2,730, registration and tags would be $683, bringing the total financed price to about $815.

Hope that helps. Thanks for your post.

[RobJ]

Mark in Baltimore wrote: Option 1 includes taxes and tags. Maryland has 6% sales tax, so with tags, the price would be very close to $27,000.

Regarding option 2, yeah, you're right, my math is screwed up. For a $45,500 truck, taxes would be $2,730, registration and tags would be $683, bringing the total financed price to about $815.
OK, that's better.

Option 1 - the 2007 - the total cost will be $42,078 - $10,000 down plus a payment of $534.63 per month ($27,000 @ 7%) multiplied by 60 months ($32,078). I'm not sure where you got the payment of $575 unless there's something else included that you didn't indicate.

Option 2 - the 2008 - the total cost will be $48,913 assuming that the $750 for the extended warranty was included in the $45,500.

So, you're talking about a $7,000 difference in price for gaining one year in both "newness factor" and warranty. Based on what you wrote about the pros and cons of the two vehicles (cargo space, working area, cheesy features, etc.), I think you're leaning strongly toward the 2007.

The 2008 gives you assurance and increased cashflow, but the 2007 does seem like the better choice for the reasons that you gave. If your income picks up at some point, you could make additional payments to reduce your financing costs. For each year of payments that you shave off the loan, you'll save about $1,000 (not a tremendous sum in the grand scheme of things).

So, that's a long-winded way of saying, I'd go with the 2007.

Using your math regarding the sale of your current vehicle, you'll get $8,000 and have to pay-off the current loan leaving you with a net of $5,500. Have you tested the "trade-in" value to see if it's worth trading vs. selling? Just curious.

Does that give you what you were looking for?

Rob

[Mark in Baltimore]

Rob,

Wow, thank you so much! That is exactly the type of approach I have been looking for. Thanks for taking the time to read my long first post, and to pay attention to the details. Outstanding.

Yes, I am gravitating towards the 2007. I looked at the 2008 and came home and talked to the wife about it. It is the essence of this statement ("So, you're talking about a $7,000 difference in price for gaining one year in both "newness factor" and warranty.") that compelled me towards the new Sequoia. But when I thought about how often I cart clients around for real estate (I mostly drive the Miata, a car I bought for the better gas mileage, and meet my clients at the homes. Only 10% of my clients wish for me to drive them around), how often I will actually drive the truck (using it for Home Depot runs, taking the dog to the vet, etc.) and the number of times I will tow my race car to the track (six times a year. Yeah, I know racing is financially stupid, but it's also fulfilling a life-long dream), I am finding it really hard to justify the new one, no matter how "good of a deal" the 0% interest is.

So, it looks like I've ditched the idea of a new truck, and will either keep the truck I have, however unreliable it has been, or will look for a 2006 or 2007 truck, possibly with higher miles (less cost but will still have the powertrain warranty) to offset the initial cost. I know it makes the most sense to keep the current truck, but I have little patience for unreliable vehicles in my life. I work brutally long hours and am constantly moving, so when I go, be it for work or play, I want to go.

Regarding your question about the trade-in value, I have not tested the waters, but even in a good market where gas-thirsty SUV's are not motoring pariahs, I would never be able to get what I wanted from a trade-in. I hav never traded a vehicle in for this reason and have always done my own vehicle detailing/preparation and selling. It's worked out pretty well.

In this market, Kelly Blue Book has my truck's value at $12,000. Assuming that they are not taking into account the market vagaries of SUV's, I figure I can realistically sell it for $8,000.

Again, I thank you for staying on-topic with your post. It helped a lot!

[Mark in Baltimore]

Richard Noot wrote:
Only if you qualify for 0%. Even if you do qualify they make money because you could of purchased it for much less thsn the $45.500.00 It works the smae way as appliance or furniture sales. They markup the item even greater than what they would normally charge and then tell you there is no interest charges until January of 2099.

Thanks, Richard. My credit score is not an issue, so I'm sure I would qualify.

SUV's are a special buying breed. Many dealers are selling very close to cost, wit some selling below cost, just to get the unit off of the lot and off of the books. But that point is moot right now, at least as it pertains to me and a new Sequoia.