Cash, Redraw Equity, Credit Card or Car Loan?
With TV shows like Top Gear, Pimp my Ride and Classic Restos on Brisbane’s beloved Briz 31, we are dazzled by some of the most beautiful, technologically advanced and most powerful cars on the market.
We create an emotional connection to these cars and imagine ourselves getting behind the wheel to fly down the open road. Some people even pin up their favourite car posters to their wall and had a collection of matchbox cars as kids (or adults). I know I certainly did.
It is no wonder that when we are in the market for a new or used vehicle, we start thinking about shopping for the car and its features rather than first considering how we are going to pay for it in the first place.
Should we apply for a car loan? Pay for it on a credit card and forget about dining out for the next 2 years or should we whack it on our home loan and pay it off over 2-3 decades? Alternatively, if you have the savings, should you pay for it with your hard earned cash?
Let’s take a look at the pros and cons of each option and the many different ways to pay for your vehicle.
Wouldn’t we all love to have a stockpile of cash like Scrooge McDuck to dive and swim through? The reality is that most average Aussies don’t have a spare few tens of thousands to cover the cost of a car.
It is a very impressive feat to pay off a car in full and we definitely applaud anyone who has done so, however there are a few ups and downs to consider.
PRO – The benefit of paying cash is that you will avoid paying any fees and interest associated with using a credit card or car loan direct from the bank.
Another benefit to paying cash is that when it comes to selling the car in the future, the process will be less complicated as the car will be fully owned by you from the start rather than being owned by the lender up until final payment.
CON – One downside to paying off a car with cash in full is that it won’t help toward your credit score for when you wish to take out a loan in the future. Paying off a car loan can help show banks and lending institutions that you are trustworthy and will have an impact on your ability to obtain finance down the track.
CON – Rainy days often hit hard and if you dig into your savings to pay for that dream car, you may not have a backup cash flow to help pay for those unexpected events that life can throw at you.
CON – Let’s face it, your new car isn’t going to be worth what you paid for in the future. Instead of slowly losing your cash as the value of the vehicle depreciates, could you actually use that cash to make money through investing or saving in a term deposit? This is called Opportunity Cost.
CREDIT CARD OPTION
For small purchases, credit cards are fantastic when you pay your balance in full when it is due, however, for a large purchase such as a car, you may regret slapping the entire purchase onto your credit when you realise the interest involved.
When looking into a 0% interest credit card deal for example, be sure that you can afford to pay the entire card off before the interest free period ends. This period is like the calm before the storm and you should definitely be careful not to get stuck in that impending storm.
PRO – You can gain a large amount of points on your credit card that can go toward rewards.
CON – High interest rates apply after initial low or 0% interest periods end. If you find yourself in financial hardship, the repayments won’t be manageable.
CON – There is no end to a credit card repayment. This can force people into the trap of repaying only the minimum repayment. For a purchase as large as a car, this can drag your repayments out many years more than what they should be and you will end up paying much more for a depreciating asset than you would expect.
This has the potential to be the most expensive option for buying a vehicle but you’d be surprised at how many people actually use credit cards to buy a car!
PULLING EQUITY FROM YOUR HOME LOAN
This option involves taking equity out of your home loan if you have it to pay for your vehicle.
Often home loan rates are lower than car loan rates and therefore it seems like a no brainer to add your car loan to your mortgage. However, what needs to be considered is the term.
Is it a wise idea to put a depreciating asset such as a car onto an appreciating asset such as your home? Like the cash option, could you use the equity to make money through investing shares or property?
CON – You will end up adding many years of repayments onto your car loan that will accumulate compound interest. This will mean that you will end up paying much more for your vehicle than the actual car is worth and a lot more interest than a straight out car loan paid over 5 years with a higher rate.
PRO – Rather than having two regular loan repayments, you will only have one to manage and it will be smaller than the 5 year car loan option.
CAR LOAN OPTION
As with the above ways of paying for a car, they all lead to the same outcome, owning the car outright. Signing up for a car loan through 360 Finance is a great way to avoid paying large amounts of interest on your vehicle and to keep your weekly routine in check. You will still be able to afford your coffee in the morning, and will rest easy when filling up at the bowser.
PRO – Car loans have an end date in sight. You can see your weekly, fortnightly or monthly repayments come out of your bank account and know that at a set date, you will be the proud owner and can move on with life.
CON – A manageable amount of interest is payable in comparison to paying for the car in full with cash.
It is really up to you to decide which option best suits you. We know that every type of payment has its ups and downs and that every Australian is a true individual.
Our ultimate advice is to consider your lifestyle and your cash flow and to not get caught up too emotionally in your dream car. Although, don’t throw away your matchbox cars and Lamborghini Countach posters just yet…