When is personal debt a good thing?

Currently sitting at a car dealership waiting for our car to be ready.
We paid cash for the car but the manager was very willing to sign us up to finance.
His argument was that at 5% it could be more cost effective than taking money from the offset if your mortgage rate is higher.
The argument makes financial sense but what would this do for serviceability?

 

If you are taking money out of your offset account against an IP, the interest rate would need to be lower than your after-tax interest rate, even if you are paying a nominal 5%, the after-tax interest rate should be significantly lower.

If you are paying more than 5% on your OO loan then call your bank and ask for a discount.

 

I agree with @Simon Moore - its hard to see how it even makes financial sense!

 

Generally the shorter loan terms on car loans hurt serviceability, more so than the rate itself.

E.g. if you have a 5% rate on a 20,000 car loan with a 5 year term, the repayment is $377 per month. This has ~$60k hit to your borrowing power.

If you increase the rate to 7.5% and keep everything else the same, the repayment is $400 per week. This has ~$10k additional hit to borrowing power.

Even though you've had a 50% increase to the interest rate on the loan, the actual impact on servicing isn't all that different (marginal at best, with a $23 increase in monthly expenses).

Compare this to a 5% home loan facility used for a car purchase. This would mean an additional expense of around $140 per month in the banks eyes (@ 7.25% P&I 30 years). The impact on your borrowing power is the 20k you've used to borrow the car itself. No additional damage done to serviceability, you've just soaked up the cost of the car.

 

Thanks for your response, I hadn't even considered tax outcome for investment debt.

Definitely paying less.

Agreed.. Maybe I should have said the argument seems logical. Was more thinking if they matched or bettered the banks loan rate.

 

Thanks Redom.
I have absolutely no intentions of taking on any bad debt but it did get me thinking. I assumed it would have servicing consequences but I wasn't sure what they would be.

 

They wont.

 

If your short on equity then car loans make sense. Preserve equity for the next investment purchase, at the expense of reducing borrowing capacity.

 

Could it be that the dealer would make just as much commission from the finance as the sale of the car? Hmm...

 

And from all the add-on insurance they sell too

Add-on insurance | ASIC's MoneySmart