Car loan / ETFs - how to make a decision

Guys, let me preface this with: I know, don't get a car loan.

BUT

I am too dumb to figure out the numbers side of this, I just have a feeling that I can't shake. Here's the story:

We would like to get a new (2-3yr old) car (in the next 6mo) before our current one needs some maintenance and rego etc. Currently only have emergency savings.

We have basically no outgoings at the moment (living with parents for the next 18mo while studying, live pretty frugally, WFH mostly), no debt and two full time incomes (60-80k each).

My FEELING is that we should get a car loan (for around 20-25k) when we decide to purchase, enabling us to spend all the money we earn on getting established in the ETF market early, whilst we spend any leftover money on paying the car loan off super early (i.e. in less than 12mo). This feels smarter than saving 25k in cash and then dumping it all at once into a car. It's a small headstart but it could still be useful, no?

Can anyone suggest why this is a terrible idea, why this is an okay idea, or how to figure out if it's terrible or okay?

Comments

  • I would buy 10-15k car with cash and would never ever ever get a car loan

  • How about when the ETFs don't perform plus the added liability of high interest rates and fees for a car loan?

    Or if you lose your job and you still have a loan on a depreciating asset?

    It's a gamble. It is not much different from having house deposit money. I mean, you could roll black and double up or you could sink all into getting that home loan.

    • How about when the ETFs don't perform

      ETFs are strictly for the long long term - basically can't not perform over 10+ years. I just want to get in early while I'm still young so they can possibly help me retire early.

      • +3 votes

        basically can't not perform over 10+ years

        Check how long it took for markets to recover from 1929 highs, or breakout from 1960s sideways pattern.

        • Thats great if that happens :)

          Buy an etf that pays dividends. if it doesnt go up, buy more every year and re invest the dividends as well.
          then one day be worth a ton more and you have a nice position built up.

      • You need to be more aware of risk.

        ETFs should go up, but to say they are guaranteed is incorrect. You need to accept you may be neutral or even lose money.

        It also worries me you are investing in a long term investment but are focussed on current short term (need to buy asap). If you apply the long term mindset all round you'd identify the car loan is not a good idea as you're unlikely to have more returns in ETFs for it, and even if you do, there is higher risk there.

        • That's fair mate, I just thought there might be an opportunity cost of having a lump sum tied up in a car.

      • Gold is for the old, tangible property is for the mature, stocks are for gamblers, ETF are for those that don't know. That leaves only one for the young.

    • How about when the ETFs don't perform plus the added liability of high interest rates and fees for a car loan?

      That is impossible. It has been well established that the mindset of ozbargain investors (or others in general) are that ETF can only go up and will outperform all other markets.

      It's like the 90s all over again.

  • Which ETF are you talking about? With the ASX almost recovered, and US indices on all time high, it would be odd to think that you need to get ETF asap, especially with unknown return.

    Easy math will be, find out he car loan interest rate, and if you think your ETF returns can beat that, go for it. Otherwise you are losing money.

    • That's fair! Thanks.

      Looks like car loan rates are around 7% for me, so let's say something like $2k total interest on a loan for 20-25k.

      I could lower that by paying off early, and surely 12mo of hard savings into ETFs etc would offset that as well? Idk. Overthinking it perhaps haha.

      • 7% is still 7% even if you pay it off early. You might be able to get better than 7% in the next year in ETFs but as the previous poster said. There is a lot of uncertainty in the market. No one is sure where the true effects of COVID will lie and the market atm hasn't really shown to be affected by COVID that much.

        Given the long term average is 10% when everything is going well. When you tax into account the tax you'd have to pay on any earnings I would take the guaranteed 7% savings over a possible earnings in ETFs

  • Interest rate on your car loan? 6% non tax deductible (in theory) therefore using after tax money (30%) = about 7.8%

    Why don't you put all the money on the car, then pump all your car loan installments into ETF. Dollar cost averaging.

    • I'm thinking Interest rate on a car loan would be ~10%+ comparison rate after all those admin fees.

      • LOL goes to show I haven't even looked at car loans. You could get margin loans cheaper than car loans against the ETF.

    • What's dollar cost averaging? New to the shares/etf stuff.

      • It's one of the two things investors know about the stock market:

        https://www.youtube.com/watch?v=x65TDamuSHU

        Seriously though, the stock market goes up and down in a semi-random manner. If you put all your money in on the 27-Feb-20 you would have lost a lot of money. If you put all your money in exactly one month later you would have made a lot of money. Dollar cost averaging suggests because it's very hard to time the market, a more prudent way to invest is by putting in your money in equal amounts over time. That way you'll avoid the mess of buying something at the worst time and also the near-impossible task of timing the market. Done correctly you should also get your money in in a reasonable timeframe where as someone timing the market could find themselves waiting for months/years.

        That said, your idea of taking a car loan to instead invest in ETFs makes little sense. I think Vanguard High Growth ETF is one of the smartest ETFs I've seen in a long time. I'm putting money in and I think it's a very good bet over the long-term (maybe 3 years, maybe 5). But, and here's the rub, I've felt that way about every investment I've ever made. I've lost a sh#tload of money and almost lost a lot more. Some dog ETFs you should look up: HVST, WAA, YMAX, DJRE, BILL, OOO and BNKS.

        In 5 year's time there may be a press article about how you should have invested in VDHG. Some new electronic broker may be doing Facebook ads saying the same. What they won't mention is the ten other ETFs you should have avoided that have either fallen in value or shut up shop because of poor performance.

        To ram home just how risky stock investing is and just how unhelpful press coverage is, I just lost a lot of money and was reminded by another person who also lost a lot of money doing the same thing that it was a Motley Fool recommendation. Do I expect Motley Fool now to switch their adverts to saying for only $499/year you too can lose several thousand bucks? I won't hold my breath.

        • What he said.

          In short. You put a dollar in every week instead of $52 at once is dollar cost averaging because you get a different number of shares every week due to price fluctuation but you have an average.

          Do I expect Motley Fool now to switch their adverts to saying for only $499/year you too can lose several thousand bucks?

          Share recommendation news letters. I've done a year of Fat Prophets, a year of Rivkin in the past. Asked yourself, if you are so good at stock picking would you just not start your own managed fund and making 1% of assets under management regardless. Some fund houses have billions under management, why trying to flog $499 annual memberships to people?

          It is like property investing courses. They teach you how to borrow 80% and make millions. If it is easy money why would the instructor not go and borrow 80% and rake it in. Instead of teaching 100 people in a room at $3k (or whatever it is) but if you are making $300k (100 people at $3k each) gross per week (say after costs net $100k) and managed 26 weeks a year you're on $2.6m. It sure beats being on $40k and having to tip into your negatively geared property 11 months of the year (12 month you get a tax refund).

  • If you can calculate your ETF returns over 10 years, average it out, and yada yada, you can calculate a car finance…

    On another note - why not a car couple years old for $15-$20k?

    What sort of car you looking for? Brand? SUV? Jap/Euro?

    Please elaborate some more details so we can try give you better options.

    Also really consider the risks (like you would with non-ETF purchases) - eg. dumping entire emergency savings, losing your job, accidentally having a kid, etc + the definite increase in expenses (moving out from parents + bills + higher living expenses) + CAR FINANCE.

    • We are looking at a low kms 2-4yr old Subaru outback, they're unfortunately in the 22-30k price range for now.

  • +10 votes

    How are you earning a combined income of 120-160k, whilst living frugally at home with almost no outgoings, yet having only emergency savings.

    Sounds like another poster talking crap.

    • Lmao knew this would come up. I've been studying full time until recently, and partner just got a promotion so we were on one lower income. Partner just had an expensive operation and we had some other unexpected costs that knocked out savings off.

      I'm not talking crap!

      • The point remains that moving into the future, you’re still going to be able to save for the car within 4-6 months without needing a loan. So again, you sound like you’re making your story up as you go.

        I should add that going off your previous posts, you’ve had your post uni job (which I assume is full time) for almost 3 years.

        • Why exactly would I do that?

          I'm not all that informed about money, I thought there might be an opportunity cost in putting everything straight into a car when we could start investing instead. It seems that's wrong! No need to accuse people of lying when they are simply stupid :)

          Going off my previous posts is misleading, I have been unemployed/studying fulltime since the start of the year.

          • @jrowls: A car loan will be roughly 5-10% interest depending on who you go with. So you would want the returns from your ETF to outweigh that on a % basis. Remember you pay tax on whatever gains you make, so you would need to increase the % return you get from the ETF even more to further outweigh the interest incurred on the car loan.

            The share market is hard to predict, especially for a novice like you (I’m also a novice and don’t claim to know what I’m doing in the market). So trying to find an ETF that will give you guaranteed returns of at least 15% is going to be borderline impossible.

            Personally I just bought 9.5k worth of AGL shares, I bought them about 2 hours before their worst nose dive in ASX history, I sold them yesterday for just over 8k. So basically I lost 1.5k in about a month.

  • If you have combined income of at least $60k each and no outgoings then you should be clearing around $8k/m after tax between you. You say you've got 6 months to buy the car so you'll have around $48k income in that time. Why would you possibly want to borrow $25k in this scenario? Split that $48k between the car and the ETF given you have no expenses.

    • I thought there might be an opportunity cost by spending all that lump sum on a car vs having it down longer in the market, but it seems people don't agree with that sentiment.

      • I guess you have quantify the opportunity cost which is what people have been pointing out. Market returns are made up of capital growth and dividend yield. Dividends have been slashed and market is volatile which is going to impact capital growth.

        If you are set on the car and the $$ you want to spend, it may make financial sense to buy it savings. Set up another bank account treat this as loan repayment for the car - transfer a set amount monthly and claw back the savings. In the meantime you can buy small parcels of ETFs.

        Also this is a good resource to help build knowledge - very useful and highly recommended.

        http://passiveinvestingaustralia.com/

        • Thanks for this,.good comment and looks like a very useful resource - I'll get reading!

  • Generally, try to avoid debt, definitely for "bad" debt (consumables) and even "good" (1. when asset is very volatile, 2. asset is overpriced, 3. interest rates are likely to rise over the long term, 4. you can't service debt over the long term).

    Note the saying: He who borrrows what isn't his'n, must pay it back or go to prison.

    You think: Of course I'm going to pay it back. So start looking at the risk factors: You lose your jobs, the market crashes after you invest, interest rates rise significantly…

  • +2 votes

    Don't get a loan for a depreciating asset.

  • OP - just listen to all the comments so far - they've all been great advice.

    TLDR - is that car loan = bad because non deductible for an asset that loses value

    But of course, you have to make your own decision, and I sense a pushback from you against the weight of opinion. And that's FINE. It's OK to buy the car you want and borrow money for it (lots do it). After all, most people buy cars with our heart not our head. Just realise the cost.

    • Thanks man, appreciate this comment and its slightly lighter touch haha.

      I am taking all of this on board, there is some great stuff here. I just wanted to know the costs and stuff I hadn't thought of so I can make an informed decision.

  • You use the word "we" a lot in your post. As in "We have … two full time incomes" and "My FEELING is that we should get a car loan…"

    So, my question is ….

    What does your partner think about your idea ?

    It's important that your partner should be convinced that your idea is sound, and that it is a joint decision, and should not be something that you force on your partner.

    Otherwise, your relationship will be badly impacted.

    • Great point! Very important consideration. She's in the same boat, we have the same goals we just don't know enough about this stuff to make a solid decision on our own so I'm seeking advice.

      We definitely make all calls as a team :)

  • If you're fair dinkum about building savings towards retirement, you simply don't get loans for things like cars. End of.

    Save your money, buy whatever car is appropriate to your means, and go from there.

    If you want the "lifestyle" that a car and various other "assets" bought on credit can bring, then go for it and enjoy yourself, but don't delude yourself in that.

    • I'm not trying to delude myself haha I am just undereducated about finance and wanted to see if a feeling I had was accurate.

      It seems it isnt! I'm certainly not planning on having anything else on credit so don't think I'm out here with five credit cards, a financed jet ski, afterpay account and begging for a car loan.

  • Buy the high yeliding asset and report back in 18 Months…

  • Without getting into the merits of purchasing a car or an ETF, the best solution would be to borrow money for the ETF and claiming interest against tax.

  • Here is a rule of thumb, it’s rarely wrong unless your super normal ability to outperform risk rewards of market.

    Pay off non deductible interest debt, really should just avoid it in the first place.
    Invest in assets after you have secured assets that would otherwise be a on going expense. (Ie. Buy and pay off house)
    Invest like crazy, don’t go conservative(because you have secured your house and car and stuff now)

    You can do it the other way around, but you need to out earn the interest and tax of these debts, which is really really really hard, I’m willing to say one in a million people can do. So if you’re one of the 25 people in Australia who can do it, congrats. ( I may have exaggerated this, I dunno for sure)

  • If the two of you are both earning 60-80k and have almost no outgoings then you should be able to save up for that car in only a few months. There's no rush.

    If you're so sure that the market is going to go up then you could put your money into your ETF of choice while you save up for a car - but I wouldn't be betting on the market to increase in the next 6 months.

  • Buy car with cash. That way as well, you'll be more likely to go "do we really need this, or that", because it's coming straight out of your bank account, not "only a few dollars a week more".
    If you both earn that amount, in stable jobs, you'll save for it in a short space of time and then focus towards the next saving goal.

  • Everyone is really piling on OP here for thinking about getting a car loan. OP, if you really want the outback (irrespective of your Q on ETF vs loan), go for it, keeping in mind what people have said re it being a depreciating asset etc. If you're much more frugal than expected, you can pay it off sooner. If not, you have the car you really wanted rather than an older model or a different car.

    Other people have made good points, and do you really need that specific car? Probably not, but at the end of the day it's up to you.