Buying a vehicle Cash vs Financing

[TJ99]

Except that in this case using someone else's money is not actually cheaper than using your own. Trying to offset interest incurred from debt with capital growth from an investment is a sure fire way to lose money.

Yes, return on equity is a measure of actual income earned from an investment as opposed to capital growth. So if the OP was earning 20% a year from dividends earned on his unit trusts that would be a very different story to 20% capital growth.

Yes, he'd end up with less because SARS taxes income at a much higher rate than capital growth.

I've yet to see anyone other than myself providing any calculations to back up what they say. Sure mine are based on assumptions which could completely change but if they didn't, it would be cheaper to borrow the money. I don't see any problem with the logic of it.

Of course, you might say that the capital growth is at risk, which yes it is, very much.

 

[TJ99]

Yep. Lets say he has invested R300 000. If he is earning R60 000 a year on that (As well as capital growth), then he should leave his money there.
But if he is just getting capital growth, then he will be losing out against daily compounded interest on the loan (At a fairly high rate)

So do the math and show us how much. I'd be happy to be corrected.

Edit:

There are some things I didn't consider... I didn't deduct the selling price from the cash example. So the costs are really 280 510 vs 480 980.55

And number 2, which could change the whole thing, if he buys the car cash and takes the monthly repayment of R6 832.03 and invests it again....

 

[JStrike]

Yes, he'd end up with less because SARS taxes income at a much higher rate than capital growth.

I've yet to see anyone other than myself providing any calculations to back up what they say. Sure mine are based on assumptions which could completely change but if they didn't, it would be cheaper to borrow the money. I don't see any problem with the logic of it.

Of course, you might say that the capital growth is at risk, which yes it is, very much.

Dividends tax in 15%. Not that high.

I really, really wouldn't want to do the math. I will leave it to you

Just saying, that as a rule ROE (and interest) are both subject to compounding. Capital growth is not.
Which is why I almost never invest in anything that doesn't give me a decent ROE as well.

In the case of a loan (especially a high interest one), not only is it compounding daily, but it is recapitalising monthly.

I don't think this situation is that clear cut, since capital growth of 20% pa is not too bad. But you can do the math since you seem to enjoy it

 

[TJ99]

Dividends tax in 15%. Not that high.

I really, really wouldn't want to do the math. I will leave it to you

Just saying, that as a rule ROE (and interest) are both subject to compounding. Capital growth is not.
Which is why I almost never invest in anything that doesn't give me a decent ROE as well.

In the case of a loan (especially a high interest one), not only is it compounding daily, but it is recapitalising monthly.

I don't think this situation is that clear cut, since capital growth of 20% pa is not too bad. But you can do the math since you seem to enjoy it

I don't enjoy it, I want to know what the right answer is.

Remember ETF's and Unit trusts don't just give capital growth and the 20% is effectively compounding every year, at least. What I mean is if you start off with R100k, in the first year you would get 20% growth, so 20k. Now the value is R120k. In the second year another 20% means your investment grows 24 that year and 28 800 the next. If there was no compounding you'd still just get another 20 000 of growth every year.

 

[Ancalagon]

Yes, return on equity is a measure of actual income earned from an investment as opposed to capital growth. So if the OP was earning 20% a year from dividends earned on his unit trusts that would be a very different story to 20% capital growth.

Right I got you. I'm trying to study for CFA Level 1 at the moment, so I'm used to encountering ROE in the analysis of financial statements. Didn't really see what it had to do with unit trusts, but I get you. The important point is the distinction between capital growth and income earned from investments.

 

[TJ99]

Best option : Buy the car cash, then invest the 6832 per month you would have paid the bank, back into the fund. Problem solved.

 

[Dolby]

What about the instability of the market right now ?

Cash out and buy the car cash ; lose your job in 3 months and you'll have R21,000 saved up and a car worth R250,000 if you sell it. You've instantly lost 18% on your unit trusts which were doing great and you're down **** street.

Personally, I want to see cash in my bank account and whether it be an operation, lost job, family trouble or a weekend getaway, I'm flush with cash.

 

[Blue Shirt]

What about the instability of the market right now ?

Cash out and buy the car cash ; lose your job in 3 months and you'll have R21,000 saved up and a car worth R250,000 if you sell it. You've instantly lost 18% on your unit trusts which were doing great and you're down **** street.

Personally, I want to see cash in my bank account and whether it be an operation, lost job, family trouble or a weekend getaway, I'm flush with cash.

You will have the same problem even if you finance the car. You will have a car worth R250k and you will owe the bank R300k.

If you are worried about losing your job, then don't buy the car at all.

 

[Blue Shirt]

This argument is flawed. After 6 years, you would have the car plus whatever you would have saved on the car payments and interest.

If you pay cash for the car, the clever thing to do would be to put the amount that the car payment would have been into the investment account.

Best option : Buy the car cash, then invest the 6832 per month you would have paid the bank, back into the fund. Problem solved.

Agreed, what I said earlier.

 

[JStrike]

Agreed, what I said earlier.

Yep

 

[borga]

Around August 2012 I wanted to buy a car and had the same decision as you, sell investments buy cash, or buy finance.

I choose to finance the car instead.

I like working with my personal finance so I monitor my investments on a monthly basis. I also monitor how my decision of financing has turned out.

So I have a excel calculation where I have 2 difference scenario.

One for where I bought cash, I then take the car payment I saved and invest it, for the monthly return on that investment I use the actual return on my investments to arrive at a value of what it would be had I followed that route.

The second scenario is the one I chose, where I have an investment which I didn't sell which I increase monthly with the actual growth on my investment, I then deduct the capital portion remaining on the car loan to arrive at a net value which I then compare with the result from scenario 1.

As at 31/12/2014 my gain from choosing to finance is about 23% of the amount I loaned (21% if I take the capital gain tax liability that I have accrued on the gain). so for me it was a good choice so far.

Things to consider.
Your deposit is not relevant to the scenario as you will have to pay it if you buy cash or finance, so only use the amount you finance.
If the after tax return on your investment is higher than your interest on your loan you will be better off financing.
The past few years the market have delivered returns far in excess of the long term average of 5-6% real return, so about 12% after inflation is taken into account, so looking towards the future the return may not be so great.
Buying cash you get a guarantee after tax return equal to the rate you would have paid, equities is more volatile. (End of Oct my gain from finance dropped to about 6% of the original loan value).
It will also depend on what rate you can get on you car loan, the lower the better it is to invest.

I haven't updated the calc since December because I am oversea for work but I believe it will still be the case that finance benefit me.

So you need to decide what you think the market will do over the next few years and then decide, since what you basically are doing is loaning money (secured by your vehicle) and investing that in stocks, so not everyone may have the risk tolerance for that. I am still in my 20's no wife/kids, so I chose to take the risk and so far it has paid off, however it can turn very quickly.

Going by past years since about 1973 the market seems to crash every 7 years, and it is now 7 years since 2008 so we could be heading into a new crash with all market hitting records high, we could also be years away from the next crash, no one knows.

So understand the risk/rewards of the decision, decide if it fits in your risk tolerance and decide what path you will take.

 

[Dolby]

You will have the same problem even if you finance the car. You will have a car worth R250k and you will owe the bank R300k

He'll have R300,000 in the bank as well which can be used to cover the R7,000 premium for a month or 12 - so very different.

 

[supersunbird]

He'll have R300,000 in the bank as well which can be used to cover the R7,000 premium for a month or 12 - so very different.

And he can take out retrenchment cover (income protection) from somewhere, I think Old Mutual and Frank.net offers such. That will pay out ones take home (aka after tax and medical aid deductions) for up to 6 months. I have such cover and when there was retrenchment hanging in the air last year I was much more relaxed about it than my colleagues.

 

[Dolby]

Look - it comes to down to preference.

I can tell you I wouldn't feel comfortable ploughing my hard earned, growing cash into a depreciating asset and having a zero balance in my bank / investment account. As was said earlier, cash is king.

 

[deweyzeph]

Your heart says it's better to owe R300 000 on a car and have R300 000 in the bank, but your head and logic really should tell you that it's better to have a fully paid for car, no debt and R0 in the bank.

 

[Maverick Jester]

Look - it comes to down to preference.

I can tell you I wouldn't feel comfortable ploughing my hard earned, growing cash into a depreciating asset and having a zero balance in my bank / investment account. As was said earlier, cash is king.

Wouldn't the cash paid to through your job actually be the hard-earned stuff?

 

[Dolby]

hehe - regardless if it hard earned or not, I'd prefer cash on hand for emergencies. Especially if the capital is growing at 20%pa ....

 

[Maverick Jester]

hehe - regardless if it hard earned or not, I'd prefer cash on hand for emergencies. Especially if the capital is growing at 20%pa ....

Then buy a cheaper car- best of both worlds

 

[Dolby]

As long as the cheaper car is also financed

 

[Blue Shirt]

Look - it comes to down to preference.

I can tell you I wouldn't feel comfortable ploughing my hard earned, growing cash into a depreciating asset and having a zero balance in my bank / investment account. As was said earlier, cash is king.

So I guess you're also happy to pay your hard-earned cash to the bank in interest payments every month, for which you get nothing but a depreciating asset.