Busting Myths: Cash vs Car Finance

Besides buying a home, buying a car is one of the most significant financial decisions you will make. It is one of the most exciting purchases. The choices are vast, from picking the right model and the perfect seats to the colour. Some of you may already know what you want. And then comes the dreadful question: How to pay for it? Should you use cash, or do you get finance? It’s one of the most common worries raised by many people in such situations. Unarguably a lot needs to be taken into consideration when making this choice. Here we have presented a list of your options and their pros and cons to help you decide.

Option 1: Cash payment

Paying full in cash is a simpler way to pay for your car and avoid all fortnightly or monthly payments and the interest on the loan for years to follow. Unfortunately, we don’t always have such a considerable amount to spend at our disposal. Putting off the purchase till you have saved the money might not be an option for you, and opting for a cheaper model usually means compromising features that are important to you. We also often come across clients who choose to finance their car despite being able to afford it. It is a bit weird, isn’t it? Let me explain. Assuming you have a lump sum saved up and opt for finance, there are a lot of things you could do with that money. Beyond booking the family holiday you have been waiting on, you could put that money for a deposit on a home or even use it for an investment that may give you higher returns than the interest that you may be paying on the car loan. If you use the car for business purposes , there may be significant tax write offs and deductions you could claim.

Option 2: Car Finance

Many people opt for car finance these days. The most common option is a car loan. However, several finance options exist that can be tailored to suit your needs. If processed correctly, finance is the easiest and fastest way to purchase a car without paying the entire amount. With finance, you would be paying for the vehicle while you use it rather than paying upfront. While you will pay interest on the car loan, interest rates are at an all-time low starting at around 3.7% and can be locked into the life of the loan to avoid interest rises. We strongly recommend alternate uses of the cash you may have saved up into an investment with a higher rate of return. Your financier will take an interest in the car as security for the loan. In doing so, your financier has the rights to the car in an unfortunate situation if you’re unable to make payments and default on the loan. Securing a car loan means that you will be paying a much lower interest rate than an unsecured personal loan. Once you pay off the loan, the financier lifts their interest in the asset, and the car is all yours. Loan terms can range from up to 2 to 7 years, with shorter or longer options available depending on your circumstances. The key to getting the most out of your loan is to consider options such as balloon payments, no early exit fees or penalties if you think you would be able to pay the loan out early. Apart from this, you have several other options that you may want to consider if you choose to get finance.

So to find out what can be tailored for you and your car, call TomorrowFS today.

Option 3: Combining with Mortgage

You may have considered drawing on the equity in your home via a refinance or redraw facility to pay for your car if you have a mortgage rather than getting a car loan. It is a charming idea, especially when mortgage rates are at an all-time low, and they have always been lower than car finance rates. Additionally, you can avoid the hassle of paying separate payments when you combine your mortgage and the car loan. However, a home loan typically takes nearly 30 years to pay off, which basically means you will paying off your car for the same duration and paying the interest for the same amount of time even if you have long sold the car. Therefore while It may seem appealing to combine the car loan into your home loan; you will be paying a much higher amount overall.

To discuss your finance options in more detail, or if you have any questions at all, we’ve got experienced consultants who can help. Give us a call on (03) 9193 3436.

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