Buying a car cash vs getting a loan

[Raevinn]

It makes sense to take out a loan most of the time as cars can cost a lot and you don't always have that kind of change available, but if you saved up enough would it make sense to buy the car in cash?

 

[Drifter]

Yes, you save a ton on interest.

 

[TehStranger]

It's not always clear-cut. If you can use the banks money while investing your own to earn higher interest than you're paying, you should probably do that instead.

 

[SpoonTech]

It makes sense to take out a loan most of the time as cars can cost a lot and you don't always have that kind of change available, but if you saved up enough would it make sense to buy the car in cash?

In general yes. Have a look at this vehicle repayment calculator:
https://www.wesbank.co.za/partners/calculators/repayment.xhtml?siteID=fnb

At 12.5%, if you get a R250k vehicle and pay it off over 5 years with no deposit and no balloon payment, you will pay R78492.36 in interest and a total amount of R332710.36 over the five year period.

This means the car is 33% more expensive than if you bought it for cash.
The other thing to note is that dealers will often give you a good price if you walk in with cash and walk out with a car.

 

[Pitbull]

It makes sense to take out a loan most of the time as cars can cost a lot and you don't always have that kind of change available, but if you saved up enough would it make sense to buy the car in cash?

On a car loan of R 300 000 you'll be paying back about R 450 000.
So you will save roughly about R 150 000 buying it cash.

 

[ahoudet]

It's not always clear-cut. If you can use the banks money while investing your own to earn higher interest than you're paying, you should probably do that instead.

This. If your investment offers more, it's worth considering vehicle finance

 

[TJ99]

This. If your investment offers more, it's worth considering vehicle finance

We've had this thread before. The best option by far is to buy the car cash and then invest the monthly amount you would have spent on loan repayments.

 

[Paul_S]

We've had this thread before. The best option by far is to buy the car cash and then invest the monthly amount you would have spent on loan repayments.

I agree but most people don't have the money to do both at the same time.
It's either a car or investments but not simultaneously.

 

[TehStranger]

We've had this thread before. The best option by far is to buy the car cash and then invest the monthly amount you would have spent on loan repayments.

Unless you need a large sum of capital to start something upfront that can potentially outperform monthly investments (think of financing a car while starting a new business).

Buying the car cash will be much easier for most people, that I agree with. But this is not a black and white topic.

 

[ahoudet]

We've had this thread before. The best option by far is to buy the car cash and then invest the monthly amount you would have spent on loan repayments.

An investment I have is averaging just over 20%. That's better than 12% interest paid back on the car

 

[Raevinn]

Thanks for the response guys.

I guess the trick is finding an investment that makes you more than interest rate.

 

[Hitchcock]

Buy cash.

Forget all the 'invest your own money' nonsense. This hardly ever pans out in real life.

 

[TJ99]

I agree but most people don't have the money to do both at the same time.
It's either a car or investments but not simultaneously.

Since the OP asked the question, we assume he has the cash to buy the car with, otherwise the question is pretty pointless.

Unless you need a large sum of capital to start something upfront that can potentially outperform monthly investments (think of financing a car while starting a new business).



Buying the car cash will be much easier for most people, that I agree with. But this is not a black and white topic.

You can start a business with R300k? Please, tell us more.

It's not black and white when weighing up investments alone vs buying the car cash alone. But if you buy and reinvest the monthly payments, it very much is the best way. Do the calculations.

An investment I have is averaging just over 20%. That's better than 12% interest paid back on the car

Even if that does continue, again, buy the car cash, and reinvest the money you would have paid monthly.

 

[TehStranger]

You can start a business with R300k? Please, tell us more.

It's not black and white when weighing up investments alone vs buying the car cash alone. But if you buy and reinvest the monthly payments, it very much is the best way. Do the calculations.

It was an example to highlight potential. Where did you pull R300K out of btw?

FWIW a family member is getting 20%+ P.A. through renting out a "rural" property in an in-demand area. They got the property by securing a bond from the bank by putting down a healthy deposit. A deposit that they could have used to buy their car cash, but didn't.

I've done numerous calculations, and the returns differ dramatically depending on the scenario. Yes, sometimes buying cash and investing the monthly repayments works out best, but it's not always a given.

Even if that does continue, again, buy the car cash, and reinvest the money you would have paid monthly.

What if he couldn't have secured the investment without the lump sum in the first place?

 

[SauRoNZA]

Really depends on the value of the car as well.

Sometimes the loan fees alone don't make sense on a cheap car.

 

[Dude Crush]

We've had this thread before. The best option by far is to buy the car cash and then invest the monthly amount you would have spent on loan repayments.

Let me propose the alternative to this... And this is what I am currently doing.

After buying my car cash, I realised that I was wasting potential capital appreciation as my money was tied up. So I refinanced the car, took the R250k and invested it. The reason this is better than paying cash and investing the "would be" installment is simple. I am earning a return of say 15% on the full R250k from month one this way, rather than 15% on R5k in month 1, 15% on R10k in month 2 etc. So provided my investment return is higher than the interest I pay on the finance, you can win quite a bit.

It is a risky return though, so there's no free lunches. If you're smart and knowledgeable about your investments, you could potentially reap some benefit. In my case, I chose to use the money for an offshore investment which is dollar based, so I've receive addition benefit of portfolio diversification. If the rand weakens, I win, if it strengthens, my dollar investment return is lower, but the rest of my rand investments do well, so overall I'm still ok.

Each persons case is unique so there's no right or wrong way.

 

[Pitbull]

Best solution if you have the means but not the cash:

Take out a second bond on your house and buy car cash. Pay what you would have paid normally over 54 months. Your interest is lower on the home loan so your car will be paid off a lot sooner and you would have paid less interest. You will also get a cash deal discount on the vehicle. Just know you need to be very disciplined. If not you're just screwing yourself.

 

[Pho3nix]

Let me propose the alternative to this... And this is what I am currently doing.

After buying my car cash, I realised that I was wasting potential capital appreciation as my money was tied up. So I refinanced the car, took the R250k and invested it. The reason this is better than paying cash and investing the "would be" installment is simple. I am earning a return of say 15% on the full R250k from month one this way, rather than 15% on R5k in month 1, 15% on R10k in month 2 etc. So provided my investment return is higher than the interest I pay on the finance, you can win quite a bit.

It is a risky return though, so there's no free lunches. If you're smart and knowledgeable about your investments, you could potentially reap some benefit. In my case, I chose to use the money for an offshore investment which is dollar based, so I've receive addition benefit of portfolio diversification. If the rand weakens, I win, if it strengthens, my dollar investment return is lower, but the rest of my rand investments do well, so overall I'm still ok.

Each persons case is unique so there's no right or wrong way.

Best solution here..

 

[whatwhat]

Lol at buying your car cash.

Putting that lump sum in an investment will earn heaps more than putting money away every month over the same time period. As the years goes on and the investment goes up so does the unit price, in year three you are buying less units for that same price as well.

Compound interest is a terrible thing if you don't understand it.

 

[ahoudet]

Best solution here..

+1