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Is it ok to borrow money to buy a car?

‘Pay cash for everything or you’ll never have any money’

That was the advice given to me by a successful businessman when I first started out working for him at 17 years old, man that seems like a long time ago. He’d just bought a brand new Mercedes Sprinter van for his Kitchen business and paid cash for it. Now I’m sure there are many people out there, many accountants probably who might argue that there are more tax efficient ways to do things but I had to take my hat off to him, he’d done well for himself and he’s doing even better now.

That’s alright for you to say I thought. You’re loaded! How was I supposed to pay cash for a car at 17 – with no chance of help from my parents – and also afford to pay for the insurance? Anyway, I decided to take his advice and bought a low end car with the cash I had.

Elation to Dejection

All was going well for a few weeks as I made my way around the area visiting everyone I’d missed seeing for years. By this time I’d also decided to set up my own small business and so was using my car to get to and from jobs. I really was loving the freedom, until one dark day things went badly wrong. I was driving along and looked in my rear view mirror only to see a cloud of black smoke and yes, it was coming from me. Due to the large amount of money it was going to cost to fix my pride and joy it really wasn’t worth fixing at all. The car was good for nothing more than the scrapheap and my cash investment went there with it.

Let’s Try Again

So I was back at square one. Not only did I not have a car to drive around in at weekends, I also had a small business to run and I needed the car to get from A to B with my equipment in toe. I decided that I needed another car quickly so I bought another one with the cash I had left. A few months later I ran into problems with that one too and this cycle continued for a while. One day – while my car was in for repair – I totted up the amount of money I had spent buying and repairing cars and also the amount of income I’d lost out on during several periods of being carless, the figure was eye-opening! I can’t remember the exact amount but it was well into 4 figure territory and that analysis led me to disobey the sound advice of my businessman friend a year or so earlier.

Not Too Bad Considering

I went online and decided to try a car loan repayment calculator just to see how much the monthly repayment would be if I was to buy a nearly new car on finance. The payment came in at around $150 a month – according to my currency convertor. Given the year I’d had it was actually going to cost me less to finance a nearly new car than it would to keep buying and repairing the awful cars I’d had. Anyway I went for the finance option, bought a car and I’ve never looked back since. I’ve never had any big problems with either of the 2 cars I’ve financed and they have also allowed me to be reliable for my business and not to lose earnings when I couldn’t get to the jobs.

I’ll admit there must be lot of good reliable cheap cars out there but unless you’re good with cars and you know what you’re buying then it’s not always easy to find one. I’ve never bought a brand new car but the two I did buy were still under warranty when I bought them, so at least I had some peace of mind knowing that any major problems would be fixed by the manufacturer. I did have to use that service once or twice I must admit but it was in a controlled manner and at my convenience.

So what do you think? Is financing a car a bad idea full stop or is it justified in some circumstances or even just a fact of life for most?    

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11 Responses to Is it ok to borrow money to buy a car?

  1. Bad idea, full stop. Cars are items that will only depreciate after time… even a house is preferable to borrow with a mortgage than a car for me, and I’m really negative on real estate in general :)

  2. dojo says:

    I had a car loan myself and paid it in 4 years. It was A LOT OF MONEY, but the car was new (it’s still in great condition, so we’ll use it for at least 10 years). The next one will be probably a used one, but there’s a difference between a good condition used one and a wreck. So the problem is to save enough to get a decent car, not one that will break under me in 3 months :D

    • Adam Buller says:

      You’re right dojo, there is a big difference between a good used car and a wreck and even a good used one can cost a lot. I know in an ideal world everyone should pay cash for things but in my case I needed a reliable vehicle and didn’t have years available to save up for one and as I mentioned, it was costing me more to keep fixing the old ones. I’ve been more than happy paying the finance payment each month, plus in those early days it gave my business a bit more credibility because I wasn’t turning up for jobs in a complete wreck.

  3. I would definitely purchase in cash rather than borrowing a money just to buy a car. For me I will only buy what I can afford and be contented with that, after how many years the value of the car will decrease.

    • Adam Buller says:

      I travel a lot in my cars Clarrise and I mean a lot. When I bought the car I kind of accepted that by the end of the finance agreement the car probably wasn’t going be worth all that much. I think that would still happen whether I bought it on finance or paid in cash though. For me the issue was the interest on the loan. At the time I decided that in a business sense because I was losing income and credibility every time I had a problem with my car, I was happy to pay the interest to have a more reliable vehicle. Plus I think my accountant was able to claim part of the interest back as a taxable expense but I’ll have to double check that. I’m not sure I’d make the same decision now that things are more financially setup but I don’t feel it was a bad move at the time.

  4. I wouldn’t even think about financing an auto. It’s a depreciating asset every time. I’ve bought and sold a dozen cars recently, all of which I paid for in cash.
    With any depreciating asset, they should only be bought with money currently had. Anything else, IMO, means I can’t afford it. Thanks for a good article!

    • Adam Buller says:

      Hey Jacob, I’m not too worried about the depreciation myself because I feel it would depreciate anyway regardless of how I pay for it and the finance payment reduces the outstanding balance so you shouldn’t fall into any kind of negative equity. That’s when I feel the length of the finance term is important. The bit I wasn’t happy with was the interest but at the time I felt the cost was worth it. I don’t think I’d ever buy a brand new car though as the depreciation there is ridiculous.

  5. Mark Ross says:

    I think one should consider both option; paying in cash and getting a loan. If you can’t afford a decent car with your cash, then I think getting a car loan is something you should be thinking about, right?

    • Adam Buller says:

      I think it’s a personal decision and it has a lot to do with circumstance Mark. I’m certainly not encouraging everyone to head out and get a car loan but I do think that there are justifiable circumstances for it.

  6. I think in certain circumstances it makes sense. I bought a new car and financed it. My interest rate is under 2%, so when you take inflation into account, the interest I pay isn’t a factor. Plus, usually pay more than the minimum amount each month and I keep my cars for 10 years. All of this added together means that for me, the small price of paying interest is worth it to me. If I stick to my car payment plan, I will pay roughly $500 in interest. To me, that isn’t a big deal.

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