Step 6.1: Buy a new car with cash: smart or stupid?
Let’s say a 2012 Toyota Camry is selling at $23,000 and you have the cash in hand. Is it worth to buy a car with cash? This very much depends on the interest rates, your cash portfolio, your income, and also your liking. The new car interest rates and ROI (Return On Investment) rates play an important role in answering this question. If the loan interest rate is much higher than the savings interest rate, yes you may consider buying it with cash, otherwise, considering buy it with loan and let the money grow. See the example below.
Case 1: ROI > Loan Rates
In this case, we are going to do the calculations when the ROI rate is higher than the loan rates.
- Earning on cash: A $23,000 cash in a fixed deposit savings with 5.5% APR will generate $1265 earning in a year.
- Total loan interest: A $23,000 car loan with 3.5% interest rate will cost you $828 total interest in a year.
Case 2: Loan Rates > ROI
This case is where the loan interest rate you get from bank or car dealer is higher than what you invest.
- Earning on cash: A $23,000 cash in a fixed deposit savings with 4% APR will generate $920 earning in a year.
- Total loan interest: A $23,000 car loan with 5% interest rate will cost you $1150 total interest in a year.
Cash says: In case 1, it is apparent that one can make $1265 – $828 = $437 extra money by keeping the cash in savings and go for a new loan.
Loan says: If you buy it with cash, yes you lose a chance to make more money if the loan term is longer.
Cash says: Extra cost is occurring when you buy it with loan because there are processing fees, legal fees, and document fees.
Loan says: When the ROI rate is higher or much higher than the loan rate, the return is higher. It is worth to consider buying a car with loan.
Cash says: Buy it with cash give you less hassle and no need go to the bank to make monthly payments.
Loan says: The ROI from bank savings is just an example, you may consider to get a car loan if you have some other debts like mortgage loan, minimum credit card payment or student loan that has higher interest rate than car loan.
Cash says: You need to take care of the monthly car payments and the payments have to come from either the savings or income. If it comes from the savings, the earning will be reduced over the months.
Loan says: You can still use the cash in hand for better investment in the future.
Cash says: Remember there are late payment charges.
Loan says: Buy it with loan if you are not sure whether the money is needed in the future.
Cash and Loan say: If the money is your entire cash portfolio, consider whether you will use it in the future. What do you say?
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