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Cash or finance?

Jan 21 2013 08:12
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A investment-savvy Fin24 user wants to know whether it makes more sense to pay cash for a car or to get vehicle finance. She writes:

I am currently 23 years old and started working at the beginning of the year.

I would like to know which option is better – buying a vehicle for cash or financing it?

My thinking is as follows:

If I buy the car for cash, I would lose the ability to earn the interest I currently earn on the funds/the potential gain (as some of the funds are invested in unit trusts/exchange-traded funds).

However, if I finance the vehicle, I would still keep my portfolio and would still be able to comfortably afford the vehicle repayments but would end up paying more for the vehicle.

I have spent years building up my portfolio by working throughout my university days and currently full-time this year. It seems like a waste to shove all those hard-earned savings into a vehicle, for which I most likely won’t get anything in return when I sell it in future.

So which option is the smarter one? Buying cash/financing?

Preston Rogers, general manager: BMW brands financing responds:

Savings or investment is more attractive and makes sound finance sense, because of diminishing capital balances on which interest is charged, on vehicle finance and compound interest on earned on your savings/investments.

It is exactly for this reason why you should not use savings or investments whereby you forego earnings on the full amount invested, which in the medium to long term far surpasses the interest you’d be paying on a falling capital balance when financing a vehicle.

Benefits of financing as opposed to using your savings/investments:

•    You leave your savings/investment intact and avoid putting strain on your cash position.
•    Savings are available in an emergency.
•    In the case of a company account you are not putting pressure on your cash flow to purchase the vehicle and should make a higher return that the interest payable if you deploy the funds in the business.
•    After a few years you will have money in the bank or your investment intact and a vehicle that has been fully paid or has significant equity.
•    Financing allows you to further improve your credit history with the bank which should afford you a lower interest rate over time.
•    Company may use the vehicle as a tax benefit if financed.

There are also benefits to buying the vehicle cash: you will be debt free, with no interest and financing administrative charges.

- Fin24

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.

Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

* Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.

 
vehicle finance  |  money
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