When is a car loan a good idea?

Hey friends!

Super excited - I bought a new car yesterday...

As an, actually new. Not just new for me. NEW new. The average 17 yo has a better car than my current one, so it was time.

Anyways, I was all set to pay cash for it but then I got thinking...maybe I should finance it.

Now - before you get all trigger happy and blow me out of the water for even entertaining the idea, hear me out.

I currently have a home loan sitting at around 2.7%. Money would be coming out of offset, so effectively, I'm borrowing @ 2.7% to finance my car.

Loan at the dealership is 3.9%. So really, it's an effective interest rate of 1.2%. Still a worse deal at this point.

But this is where people come unstuck when it comes to being focussed on interest rate - having liquid cash creates opportunity.

If I pay cash for my car, that cash (and opportunity) is gone. I can't use it to grow my asset base. I can't take advantage of any kind of opportunity with it. Which means there's an opportunity cost associated with the use of my cash, as opposed to getting finance for my car.

This is something that's also not considered when paying P&I for investment lending. You gotta think - what else could I be doing with the cash I'm using to reduce this debt?

If you're still in accumulation phase, using cash to pay down investment debt rarely makes sense - you could be using it to buy assets that are gonna grow and put more money in your pocket, instead of owning more of an asset you already control and will grow with or without your additional payment.

 

part of that interest may be deductible too.

 

Depends on stage, right. For those who have been doing it for a while, its no longer about just maxing out exposure.

 

More importantly, what car did you get??

 

Australia’s #1 Car Subscription website - carbar.com.au | Carbar is also an interesting alternative. Depends on type of car and how much depreciation etc.

I think it comes down to what you are going to miss more in the future. The cash and the opportunity or the weekly hit to the cashflow and serviceability.

 

Curious, have you used this yourself???

 

A mate of mine has just signed up a couple for his rapidly growing business. Will likely buy $15k ish ones for cash throughout the year, but he needs the cash more than the weekly outlay at moment but needs the vehicle to generate income.

 

You've also got to consider the opportunity cost of the servicing hit you'll take from getting a car loan. If you're going to get a car loan and take on an additional commitment of $700/mth, how much does this reduce your borrowing power? In many cases this might be the difference between being able to borrow what you need for the next IP.

Even worse, you take a novated lease. If a regular car loan will hurt your servicing, a novated lease will devistate your servicing.

Personally I prefer to pay cash for vehicles. Honestly I think that if paying cash for a new car is going to hurt your investment plans, you probably aren't ready to buy the new car and get a used car. (Disclaimer: I indulged in 2016 and bought a new car, still loving it, but I saved for years for it).

 

I’m stuck on a terrible owner occupier rate of 3.5%. I paid cash nearly 4 years ago for a new car from my redraw. I personally don’t like having large owner occupier debt although banks punish you for it. Or even won’t give you a loan as it’s under their limit! They love you to have more debt. I can’t wait to never deal with them.

 

I recall @kierank bought a car out of offset money or maybe I am wrong. I still stick to my BA Falcon wagon. Helps me to strike up a conversation with young backpackers.

 

RACV (I think) published an article years ago about the potential cost of withdrawing from your mortgage for a car, compared to getting a car loan for a specified number of years.

The interest rate from the (increased) home loan sounds great unless you take 20 years to pay it off - therefore increasing the interest payable.

Whereas with a car loan, you really have to pay it off in the specified. number of years.

Their advice was to increase your mortgage payments until the amount was ‘paid back’ within a certain time frame.

Not such an issue if everything goes into an offset, I guess.

 

Yes this exactly.

 

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so the home loan you are referring to initially is an investment home loan?

In any case, wouldn't taking out a personal loan impact on serviceability?

 

You can still pay cash for your car and get finance on the purchase price + GST (which you may be able get back it) for a certain amount of time afterwards and the best part is you can do it with a balloon payment. What a lot people do is try to get the cheapest price. I try to pay as much as I can, but get the highest trade in price. What counts is change over price and the most cash(as cash is what grows your wealth) . Put cash in my LOC, which can be multiplied and used for the next 3 annual payments after which perhaps refinancing balloon payment, with another balloon payment . Either Trade in money can be used to cover final balloon payment, or loot from return on loan can be used. I dont see using vehicles any different than using a houses or land for security it is still just using property to finance asset growth and cash flow. The shares that pay double the interest rate as well as give you CG dont care how they are financed. Time. inflation and compounding is marvelous after 5 years final balloon seems trivial. You can get to a point where vehicle finance is the only finance you can get .

 

Corolla hybrid It's very cute and I went all out and got the heated seats

 

Haha not quite

 

PL will definitely impact servicing, but for some people the access to cash is more important than the hit - especially if their borrowing capacity is strong.

If their borrowing capacity is tight (for mortgages) they can still use their cash to increase their assets through shares, for eg...or a side hustle, or anything. They can probably still service a car loan even if they're maxed out for a mortgage.

 

My old car was so crap that even the back packers would turn up their noses

 

I withdrew cash from an Offset attached to an IP loan, not an PPOR loan.

The loan is I/O and the rate was 2.89%.

So the “interest charged on the car purchase” is fully tax deductible (even though the car is 100% private use) .

Note, we are in pension phase, not accumulation phase. Hence, maximising serviceability, buying more growth assists, ... is no longer part of our game.