Monday, March 5, 2012

Use Home Loan to Buy Car ?

Matthew is refinancing his property @ 4.2%.  He will have an extra $100k.  So he is planning to buy a $100k car too.  The car loan is offering him 2.88%.

Should Matthew use his home loan to buy this car or should Matthew take the car loan ?

The answer, contradict to common comments, is actually home loan but . . .
Assumption : 7 years loan

Reason 1

If you take home loan approach, your monthly repayment is $1,376.11
If you take car loan approach, your monthly repayment is $1,430.48

You will have a better CASH FLOW 
with the home loan approach.
You pay less.

Reason 2

If you take home loan approach, you have paid a total of $115,593 after 7 years

If you take car loan approach, you have paid a total of $120,160 after 7 years

You save a total of $4,567 with the home loan approach.

So either way you analysis the comparison, it is BETTER to use the home loan to buy the car instead of getting the car loan.

WHY ?  How can this be possible ?  How can 2.88% worst than 4.2% !?!?  The answer is all in an old post.  In short, car loan rate is 1.9x equivalent to home loan rate.  So in this case, 2.88 x 1.9 = 5.4 which is higher than 4.2% ( home loan ), hence this particular car loan is not better than this particular home loan.

However . . .

1.  The home loan is NOT a 7 year loan.  Above analysis is only valid if Matthew top up $1,376 monthly repayment to his 'flexi' home loan.  Else continue paying original repayment amount would drag this extra $100k loan to 30 years, that will make home loan a losing deal.

2.  his home loan offer is actually BLR - 2.4%.  So if the BLR raise above 8% one day before the 7 years period, this may become a losing deal again in future.

The world is fair and balance, in this particular case, it is obvious scientifically better to use home loan to buy the car instead of getting another new car loan ie. a saving of 4.5k plus.  However, it does come with certain risk ie. future BLR rate and a requirement - discipline top up repayment.


T Box said...

He should get a car loan instead.
Keep the 100k wait for the right opportunity for other investment purpose with higher return.

T Box said...

He should keep the 100k for other investment purpose with higher return.

Go ahead with the car loan with loan interest rate 2.8%

Alan Tan said...

not a wise decision as car is an liability...Focus getting an asset

Mt. said...

Thank you all, all are great comments, ie. 1) should get asset not a liability as car but in this case, his 9 year old car always break down and cost even more . . .

KCLau said...

If Matthew wants the highest leverage, he can do it by taking maximum loan so it makes sense to take the car loan now because after several years, he can no longer finance his car for 100k because it has depreciated.

If Matthew is one of those people who hate to have debt, taking up the home loan will make more sense because he can pay it off earlier whenever he has extra funds.

Anyway, Michael's analysis is great to compare the total amount paid over 7 years. Well done!

Unknown said...

Agreed with T Box.

Marky said...

I think, Personal Loans are more likely to be used in buying a car, rather than that home loan.

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Chris from said...

Cash has always been the safest and best option if you can pay up front. However, if paying cash leaves you with little or no money in the bank, you might be better off with a home loan. Make sure, however, you can afford the payments. If you default, you could lose your home.

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Terence said...

Perhaps it would be better to use a home loan (or refinance home loan) to restructure debt or for investment. The financial planners in this network seem pretty well-versed in using mortgages: Home Loan Malaysia

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