Buy car with cash when car loan is high? Smart or stupid?
Previously we did a simple calculation to compare buy car with auto loan and buy car with cash in the United States. The result somehow turn out buying a car with car loan is more practical as buyer tends to save up few thousand dollars in the end. The logic works for some other countries which have different kind of auto loan system than the U.S. including Malaysia, Thailand, and Singapore (see also: buy car with cash in Malaysia: Smart or Stupid? and Buy car with cash vs. Buy car with auto loan). After some of our editors had a further discussions with some auto dealers, here is another case to compare whether it is better to buy car with cash or with auto loan when the loan interest rate is high.
Buy car with cash vs buy car with auto loan
In this case, we are going to calculate buying an exotic car that priced at $185,000. Now we have the cash of $185,000 saved in an equity fund that gives 3.5% return on investment per year, which is $6,475 a year. Here is how the calculation goes if we buy the supercars we love with cash and refuse to take 5 years auto loan with high interest at 5.85%.
- Cash paid for car: $185,000
- Cost for car loan: $0
- Earning lost on cash: $6,475*5 = $32,375
- Total cost of the car: $217,375
What if we keep the $185,000 in the same place and go for car loan?
- Cash paid for car: $0
- Cost for car loan: $28,820.75 @ 5.85% APR
- Earning on cash: $32,375
- Total cost of the car: $213,820.75 – $32,375 = $181,445.75
It seems we pay less in the end of the day if you take up a car loan. This is different with what we previously wrote “Refinancing car loans into home loan”. We will only pay $213,820.75 in total for the car if we go for car loan. But do not forget that the $185,000 saved in the equity fund with 3.5% return still give $32,375 return in 5 years. Therefore, if deduct the money “born” from the $185,000, the total cost for the car is amazingly cheaper that the price tag at $181,445.75. In a nutshell, buy car with cash is seems not a wise decision even the car loan interest rate is higher than what we can earn from the cash amount we have.
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