Blog

  • Home
  • Blog
  • Answers to your Never-Ending Dilemma -- Should I Get A Car Loan Or Pay Cash?

Blog Details

Answers to your Never-Ending Dilemma -- Should I Get A Car Loan Or Pay Cash?

Let me make it very clear at the beginning. If you are reading this blog post, then you must surely love cars. Or you are all excited about your second-large investment, just next to buying a home.

Yes, we Australians do love our cars. The year-on-year rise in monthly sales of new domestic is one indicator. Here’s what Wikipedia has to say about the automobile industry in Australia:

Monthly domestic sales of new motor vehicles

monthly domestic sales.png

 

One question I often get asked is about the best way to finance a new vehicle -- Should I get a car loan or pay cash?

Well, let me take the first option. Have you ever borrowed a bowl from a neighbour? If you have, you are familiar with the friendly custom of returning it with a few goodies. A car loan is similar to that. A lender approves your loan and gets back a huge chunk in the form of interest.

Coming to the second alternative. It is indeed rare that you have the entire cash for a new or used car to write a cheque in one go. So you choose a financing option at minimal interest rate, walk into a dealer store, and drive away a brand new Porsche. Seems simple, right? But, sadly, that’s not all.

Therefore, today, I will calmly and most willingly sum up few pointers to soothe your dilemma. I shall try to answer one particular question:

 

Should I Get A Car Loan Or Pay Cash?

I’d like to start with an example given by my buddy, Sam. He is of the opinion that one should never BORROW cash -- from anyone -- even if your wallet is empty and you can have only ice for dinner! When I raised my doubts, he vowed that he had recently bought a Volkswagen Polo and this is how he saved long-term on his purchase:

A simple online calculator reflected these results:

paying cash.png

 

Quite convincing, I must say!

But I too did my own research and came up with a bunch of reasons that compel me to take the cash route a little more seriously.

 

The Pros Of Paying Cash For A New Car

pros of paying cash.png

  • Better Scope For Negotiation

Loan options arrive with several spectacular offers, including minimal and zero-interest rates. However, each choice comes at the expense of a higher price and hidden costs. If you go through the fine print, you will come across rebates offered to buyers who do not opt for loans.

In short, you are in a better position to present effective arguments when you arrive with a cheque at the negotiation table.

If you read our blog on car loan tax deduction, you will know that a loan for a personal vehicle never comes with tax rebates. Therefore, it is another great liability for the regular tax payer.

  • A Car Is A Depreciating Asset

The moment you drive off with your car, it starts depreciating in value. With time, you begin to owe more on a car loan than your vehicle is actually worth.

  • Monthly Interests Are A Huge Headache

Whenever you receive your much-awaited salary, the obligation of that regular instalment pops out every month. Imagine, how easy life would be without those extra dollars draining out from your account! You could save, go on a vacation, improve your home, or maybe increase your everyday spending. You could even stow away this cash and buy your dream car all at once. Right?

  • A Car Loan Does Not Reflect The Actual Vehicle Cost

When you purchase a car with cash and sell it years later, you shall realize how much a vehicle depreciates in worth. But when you avail a loan, this amount is not that clear. Most likely, at the end of your tenure, you will trade it for down payment and use the cash for your next purchase. Thus, it is just an unending cycle.

So here is the deal. Buying a car through cash gives you immediate ownership -- without the worry of it being taken away -- even when you are going through a financial crisis. You are the sole owner -- carefree, hassle-free, and instalment-free!

But wait. Is that all? So cash is the correct choice. Is it not? Am almost beginning to believe that.

No, not always. I am not here to sway you towards one side. Let me shed some light on its downsides as well:

 

The Cons Of Getting A Car Through Cash

cons of cash.png

 

  • So Much Cash Is Generally Not Available In Hand

The biggest downside of paying in cash is that you simply need to have that much money. A premium-model car will cost a lot. In this case, you require to evaluate your budget -- maybe even consider going for a well-used model.

But when your wife or daughter insists on a premium make and you do not have the cash in hand, financing might be a safer option.

Yes, cash comes with opportunity costs -- the money invested is unavailable for other important expenses. You can even invest this amount and earn more money! Better than wasting away on a minivan right?

Now what? Again the same problem -- should I get a car loan or pay cash?

I will begin answering this once more with another question:

 

When Should I Opt For Car Finance?

when should i opt for car finance.png

 

The straightforward answer seems to be when you are low on cash. But I have summed up some other scenarios as well when a car loan seems to be a more viable option, even when you have the required cash available.

  • If You Qualify For A Favourable Interest Rate

If this is the case, you might not actually lose much money by going for a car loan. The cash can then be kept for other projects or investments.

I decided to again take up Sam’s calculation here. Suppose he shopped around a bit for his $26,000 Polo and ended up with an agreement of an 1% rate for 3 years with a $5,000 deposit.

Using a simple online calculator, here is what I found out:

vehicle loan calculation.png

 

Not only do you get to keep your leftover $21,000, the total interest is only $325. Is it not better to save that $21,000 in your bank than letting it remain tied up in your car? You can maybe invest this amount and actually earn more than that $325 of interest cost.

This choice makes even more sense if you have a big purchase in the future -- for example, a home. Financing the car would enable you to have more savings to pay for the down payment of your house.

Another alternative is opting for a ballooning option with your car loan -- which will help you in preserving the cash flow during the term of the loan by lowering your monthly payments. The temporary savings (due to reduced monthly payments) can be further invested to earn a better rate of return.

  • If You Are Eligible For A Secured Loan

Car financing is possible through two methods -- a secured car loan or an unsecured personal loan. In the former option, the lender allows you to own the vehicle at the time of purchase -- with the financier availing monthly interests on the vehicle as security for the loan. They can seize your car if you default in payments.

But in this case, the interest rate is much lower than an unsecured loan. Once the loan tenure is over, the car is all yours!

 

Final Word

I accept that paying cash seems legit when you cannot avail a good interest rate and just need a regular, inexpensive, or second hand car. But my strong recommendation would be to think it out twice.

Consider your exact requirements, plan out a long-term budget, shop around for some good deals, and then arrive at a conclusion. After all, it is a major investment and can have a significant effect on your future plans.

Yes, whatever decision you settle on, never ever put your real life goals further out of reach!

Disclaimer

Kindly seek professional advice.

Free eBook - 10 Tips To Avail The Best Rates On Your Car Or Equipment Loan

Subscribe to Email Updates

Free