You may have heard people are claiming its better to get a car loan than buying it with cash even if you could, especially from those car salesmen. Likewise, property investment gurus say that its better to get a home loan. These are some of the key reasons why they say loan is better than cash;
- Liquidity - keep your money with you, you may need it in future.
- Income tax department may come 'disturb' you seeing that you have loads of cash.
- buying stuff with loan usually gets more gifts.
It shouldn't be too hard to realize the main reasons why people pursue you to get a loan is because they may get a share of the interest you are paying. For example, car salesmen earn double the commission when they sell you a car with loan. Property agents want you to buy more property with the limited money you have hence they can earn multiple commission instead of just once. Other than that, most others who pursue the same are most properly are just due to ignorance.
This situation is exceptionally terrible when you are buying a new car. The car salesmen will literally give you a bad service if you mention you will buy the car with cash. They will try their worst effort pursuing you to get the loan no matter what. Else they would rather NOT sell you the car at all.
Getting a loan simply mean Pay Less NOW AND Pay More at the end. To be precise, you will have to pay interest to the loan you are getting.
Loan = Cash + interest
So you will definitely be paying more when you buy something with a loan. If you do not need the facility of 'Pay Less Now', you are basically paying the interest for nothing but ignorance.
Lets clear away the simpler excuses first;
- Income tax only penalize those who earn income illegally so unless you DO have something to hide else there is really no reason to worry about any audit.
- All 'gifts' come from your own money, the more gifts you receive in a deal, the more suspicious you should worry about the real value you are receiving.
Now the toughest part is the liquidity. It will be very hard to say keeping some money with you is NOT a liquidity option. But it is not necessary always the best liquidate option.
First of all, when you buy something with cash, its just between you and the seller. However, when you get a loan to buy the same thing, there is at least an additional party involved ie. the person who gives you the loan. Its has not just become a 3 parties complexity, its actually a totally 2 different transactions and a 4 different roles play.
( with Cash )
Buyer and Seller
( with Loan )
Buyer and Seller
Borrower and Lender
So in addition to the interest, you will also pay more fees when you get a loan. When you want to sell your item, you will need to pay this fees again and perhaps also getting approval from this lender. Relatively a cash purchased item can be sold off immediately. From this perspective, doesn't cash purchase sound like a more liquidated option ?
Lets say you could buy something with cash at $100,000. You may also get a 5% loan and pay $1,060 monthly for the next 10 years.
Lets say half way down the road on the 5th year, the item has depreciated to $50,000 (13% depreciation rate). If you bought it with cash, you would end with a net cash $50,000 after selling it. If you got a loan, you would have paid $63,639 in the past 5 years, meaning you still have $36,361 cash at hand. Together with the $50,000 you may think you have more than $80,000 but you still have to repay the capital left in the loan, so at the end you end with a net cash of less than $40,000 which is less than the cash purchase option.
On the other hand, lets say your item appreciate 10% a year. On the 5th year, you could sell it for $161,051. But if you got a loan in the first place, you may get back about $140,000 net, which is still significantly less.
So no matter if your item appreciate or depreciate, if you sell off your item earlier or later, buying something with loan will only end you with ;
- slower to sell off your item because it involves 2 transactions and it cost more fees too
- getting less cash back at the end
The last I check, disposing something off slower and getting back Less cash is NOT exactly a liquidating option at all.