Car Loan or Buy Outright?

dentani on 01/08/2023 - 19:53
Last edited 01/08/2023 - 19:56

We've purchased an expensive car last year and will receive it soon, so I was wondering what the best way to pay would be. I always assumed buying outright is better than having a loan, but perhaps I'm missing something.

We're able to fund the car which will cost us about half of our savings. These savings are currently in our home loan offset account, so taking these out will increase how much interest we pay. Our home loan interest rate is 5.70%.

An alternative is to get a car loan. For example 60 month loan will be 7.50% interest, quite a bit higher. Also having a car loan might hurt us later if we want to refinance etc.

I am aware purchasing an expensive car is not the OzBargain way, however, this is now done so I'm more interested in figuring out what the best way to pay is. We can afford it, so that's not an issue.

Financial Car Loan

Comments

  • Muzeeb on 01/08/2023 - 19:54
    +11

    You've visited the wrong website to ask this question.

  • brendanm on 01/08/2023 - 19:57
    +1

    What's expensive?

    • dentani on 01/08/2023 - 19:58

      130,000 :)

      • brendanm on 01/08/2023 - 19:59
        +9

        Fair enough, outright is better, as you will pay less overall. Can't imagine spending $130k on a depreciating asset.

      • [Deactivated] on 01/08/2023 - 20:14
        +3

        That's outrageous!

        I could have bought 3x Hermes Kelly bags with that and had change left over

        ;)

        • dust on 01/08/2023 - 20:36
          +2

          Or (at least) two Toyotas.

          • [Deactivated] on 01/08/2023 - 20:38
            +2

            @dust: lol - I've already got 2x Toyotas !

      • Pascal on 01/08/2023 - 21:21
        +1

        Holy, that is three Jimny's on road…with multiple years of insurance and rego covered.

        • bhubb18 on 02/08/2023 - 08:34
          +3

          Also 130 AU Falcons, maybe 75 if you need them to have rego

  • deveshwar0 on 01/08/2023 - 20:01
    +1

    It's always better to pay the least interest. The way I would suggest is to split your loan for the value of the car loan and ask the bank for a repayment amount to clear the loan in the next 5 years. This way you pay the car at the home loan interest rate but not over the traditional home loan term of 30 years.
    If at any stage you find that it's become unaffordable, you can start paying the minimum payment for a while.

    • sumyungguy on 01/08/2023 - 20:11

      OP has $260K available as re-draw, probs doesn't need financial advice… unless it was a windfall? Should be buying a better home.

      • dentani on 01/08/2023 - 20:14
        +3

        Not a windfall, we've got decent jobs and are pretty good at saving money. We saved $350k in 4 years, starting at $0 after buying our house.

        Having said that we can always learn more about how to improve our finances.

        • sumyungguy on 01/08/2023 - 20:21

          I've never loaned for a car being a depreciating asset and have always used redraw. Conventional advice is to increase your loan repayments slightly so you're not paying off the car over the term of your mortgage. But if over time you find you've been able to rebuild your redraw then it really doesn't matter. Happy motoring!

        • kiriakoz on 01/08/2023 - 21:41

          Random Question: Did covid help you save money? It genuinely kickstarted my more intense saving habits. I guess working from home, having all that spare time etc helped me get organised and save more efficiently. Wondering if you experienced the same.

          • dentani on 02/08/2023 - 09:57
            +2

            @kiriakoz: It didn't hurt, but we've always been good at saving. I think a key thing was not increasing our spending too much while increasing our income.

            • kiriakoz on 02/08/2023 - 10:40

              @dentani: That's a good point. A lot of people do almost automatically upgrade their house, car, holidays etc when they get a pay raise. Not sure why that mindset - if the old lifestyle was good enough for you before, what's suddenly changed?

        • SlickMick on 02/08/2023 - 13:49
          1. minimise non-deductable debt
          2. minimise deductable debt, unless ROI > interest + risk factor
          3. according to your risk threshold, decide your tolerable deductable debt where ROI > interest + risk factor

          If you want to improve your finances, spend the least you can on cars.
          I'd be questioning the cost benefit analysis of a $130K car. If you have your reasons, that's good, but it surely won't align with your wanting to learn how to improve your finances.

          edit: Hash points cause bolding

          • dentani on 02/08/2023 - 16:43
            +1

            @SlickMick: Well, sometimes it's nice to have some fun with your money. Not everything needs to be about cost-benefit. :)

      • deveshwar0 on 01/08/2023 - 21:43

        So your financial advice of buying a better home trump's mine of paying the car loan within 5 years?

        • sumyungguy on 01/08/2023 - 22:05
          +1

          Not trying to trump you, just offering a counterpoint. The few owners of $130K+ cars I know are leasing because they're more leveraged into residential and/or commercial property (appreciating assets).

    • RMBC on 02/08/2023 - 17:49

      Not true, tax deductibility is a consideration, as is tainting loans for non-deductible purposes. It doesnt sound likely in this instance, however if there is any business/work related use, this is a necessary consideration

  • Ghost47 on 01/08/2023 - 20:01

    Can you buy two of them without blinking?

    If not, finance for a few years. When the balloon payment comes up sell it, and finance a new car. This way you get to enjoy a brand new car every few years.

    • chriskq on 01/08/2023 - 20:08
      +1

      that sounds like an endless trap… do you work in the finance department?

      • Ghost47 on 01/08/2023 - 20:10
        +1

        Plenty of people (well, those who want to drive new cars every few years) do it.

        It's not a trap, OP can get out by selling the vehicle for enough to cover the balloon payment. If it's a trap tell me what I've missed.

        • Drpepper666 on 02/08/2023 - 13:14
          +1

          Plenty of people eat maccas burgers doesn't mean they are good or healthy lol

  • vinni9284 on 01/08/2023 - 20:15
    -4

    Home loan offset is the banks money (although you think its yours). So if you use it, then you lose the interest offset savings. Then your car will be invariably twice the cost by the time you pay it off (assuming no change). Car loan is better. Although you pay more interest up front, it is capped for 5 years rather than the remaining balance of your home loan.

    • brendanm on 02/08/2023 - 11:32

      What terrible advice. If op can save the amount they have, I'm sure they can figure out not to pay their car off over 25 years 😂

      • vinni9284 on 02/08/2023 - 14:34
        -1

        It doesn't happen in reality. Actually, many refinance to get more offset and the loan duration is reset back to 30 years

        • brendanm on 02/08/2023 - 14:35

          Op has 260k sitting in an offset.

          • vinni9284 on 02/08/2023 - 14:38
            -1

            @brendanm: I didn't take too much time reading through all the posts. Then I would recommend to pay up front and not borrow

            • brendanm on 02/08/2023 - 14:38

              @vinni9284: It's literally in the OP.

              • vinni9284 on 02/08/2023 - 14:39
                -1

                @brendanm: I've read the title and some posts. No $260K sitting offset declaration in title

                • brendanm on 02/08/2023 - 14:40

                  @vinni9284: The OP. Original post. Right up the top.

                  We're able to fund the car which will cost us about half of our savings. These savings are currently in our home loan offset account

  • imnotgoingtopayrrp on 01/08/2023 - 20:15
    +7

    The Ozbargain way is to buy a severely depreciated expensive car, then ask the Ozbargain community if the local mechanic is ripping you off, and then getting torn to shreds by the Toyota crowd (98% of Ozbargainers*). *at a guess.

    • dentani on 01/08/2023 - 20:20
      +2

      I am one of those, I suggested a Toyota when my wife brought up the idea to replace our Honda. She's obviously not an Ozbargainer so shot down the idea.

      • brendanm on 02/08/2023 - 11:33

        What did you buy?

  • Trying2SaveABuck on 01/08/2023 - 21:41
    +1

    can you 'tell us the car' it actually might help with the answer

    ie if you can get the car on something like Smart Fleet certain EV now have pretty good deals due to the way the government has changed the laws….

  • kogi on 01/08/2023 - 22:08
    +6

    TALK TO YOUR ACCOUNTANT.

    • Noblejoker on 02/08/2023 - 10:06

      ^^ This - can you claim tax deduction for this vehicle via business etc.
      You are in top tax bracket so a 30% saving on 7.5% interest would make the real cost less than the non-deductible home loan
      Plus you may be able to claim running expenses as a deduction too

  • dcep on 01/08/2023 - 22:11

    Our home loan interest rate is 5.70%.
    An alternative is to get a car loan. For example 60 month loan will be 7.50% interest, quite a bit higher.

    Interest on an auto loan is calculated using simple interest, not compound interest, meaning the interest doesn't earn interest. Interest on a car loan is often front-loaded so that early payments pay more toward interest and less toward the paydown of the principal loan balance.

    Homeloan interest is compounding with the addition of interest to the principal sum of a loan – basically meaning that you pay interest on interest. Mortgage compound interest means additional interest has been added to the initial loan. The longer unpaid loans sit, the more interest will accrue. When interest is compounded on mortgages, you pay interest on top of interest.

    https://www.investopedia.com/ask/answers/032515/how-can-i-te…

    • freefall101 on 01/08/2023 - 22:32
      +2

      Both types of loans work the same way in Australia. If you had a house loan and a car loan of the same amount, the same interest rate and the same payment terms they'd both be paid off in the same amount of time. In both cases if you don't make payments then the interest is added to the balance and interest can be charged on that amount. In both cases you pay more interest early on than payments on the loan balance, that's simply how loans work.

      • dcep on 01/08/2023 - 22:48

        Say 100k car loan 7.5% interest.
        For argument sake, homeloan interest at the same 7.5%.

        You take 100k out from your homeloan offset account to buy it outright.
        Your total outlay of doing so, will cost you more than taking out car loan at 7.5% fixed simple interest.

        • freefall101 on 01/08/2023 - 23:04
          +2

          Nope. You're looking at US laws in terms of simple vs compounding. In Australia it's different.

          If you have a loan in Australia they calculate the interest based on the balance of the loan, they can't calculate it based on the balance of the loan plus hidden interest (i.e. your compounding). If they were doing that, they'd need to update your loan statement daily.

          It's also pretty insignificant. Let's say, for argument sake, you have that 100k loan that's calculated daily and compounded vs a simple calculation. You take a 100k loan, 7.5% interest "simple" is $616.44 in a 30 day month. 7.5% interest "compounded" is $618.28. 5.7% interest is $468.49.

          The effective difference of simple to compound is 7.5% compound would work out the same as 7.522% simple. Assuming it could even be calculated this way in Australia, which is can't.

          • dcep on 01/08/2023 - 23:11

            @freefall101: Say 100k car loan 7.5% interest over 5 years as per OP situation.
            For argument sake, homeloan interest at the same 7.5% over 30 years.

            Say OP got a 800k homeloan with 100k in offset.
            OP take 100k out from homeloan offset account to buy it outright.

            Now you can go to CBA / NAB / ANZ , or every other Australian homeloan calculator.
            Plug in the figure 800k homeloan 30 years 7.5% , with 100k offset , without 100k offset.
            Compare it against car loan 7.5% fixed simple interest amount.

            • freefall101 on 01/08/2023 - 23:54
              +2

              @dcep: There's an even easier way to do this.

              https://www.commbank.com.au/digital/home-buying/calculator/h… - Commbank home loan calculator
              https://www.commbank.com.au/digital/calculators/personal-loa… - Commbank personal loan calculator

              Put in 100k at 7.5% for 5 years. Both wind up with exactly the same payments.

              As I keep telling you, the compound vs simple thing is only in the US. Australian banks don't calculate the repayment daily and compound it. If you have a home loan, go look at the statement and calculate it out yourself.

              At the same time, compounding the interest alone is fairly insignificant. Compounding over 5 years vs simple is about $100 difference at a 7.5% interest rate on a $100k loan over 5 years (as mentioned, about 0.02% on the loan). You can pretty easily calculate this in excel, just setup a calc that compounds daily vs grabbing the monthly rate. It makes the US banks a few extra bucks but it's pretty immaterial to the individual.

  • Hugh G Rection on 01/08/2023 - 22:14
    +1

    i would pay the bulk of it up front, then get a small loan for the difference like 30k. it will just improve your credit score.

  • Stopback on 01/08/2023 - 23:33

    Sell car. I'm sure you can get back more due to demand

  • kiitos on 02/08/2023 - 08:02
    +1

    Any option for claiming vehicle use on tax?

  • FocusRider on 02/08/2023 - 08:07
    +1

    What car did you buy?

    I’m guessing Euro

  • jrvb42 on 02/08/2023 - 09:24

    Maybe ask this on Ozexpensive?

    But seriously, if you can package it thru your employer, finance it via a novated lease.
    Otherwise buy outright.

  • Mugsy on 02/08/2023 - 10:15

    But outright unless you can get a better interest rate for your car loan or a novated lease works out better than your home loan.

  • 2esc on 02/08/2023 - 19:48

    If you can pay outright why would you get a loan?

    Pay outright.

    • Mugsy on 02/08/2023 - 20:27

      If the funds were sitting there doing nothing, paying outright would be a no brainer.

      But the funds are in an offset account so if he can access alternative funding that's less than his home loan costs, then that's a more desirable option.

      The challenge for the OP is to try to find a car loan with less than his home loan interest rate of 5.7% (which is unlikely) or investigate novated lease options… he'll want an accountant to advise if he's better off with a novated lease or paying outright.

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