Cash Vs Cheap Interest Rates

Added on May 10, 2013

There is an age old argument that rages on, that should you use your hard earned and saved cash to buy something like a motor vehicle that depreciates.

The short answer could be yes, but only if you are the type of person who is a very dedicated saver and has a very firm budget in place for your daily living.
Here are some facts:
Australia has the lowest interest rates on loans that it has ever had.

The difference between what interest costs you on a loan and what you get by keeping your cash in the back is at Australia’s all time smallest margin.

Cars depreciate at faster rate than ever before, some cars at over 60% after 3 yrs.

Most Australian’s do not replace the savings that they spend on big ticket items as quick as the term of a normal car loan.

Here is the reasoning that can be used for using Finance Instead of your hard earned Savings in the bank for a car purchase.

If you buy a car for $40,000 using your savings, that car will deprecate to probably being worth approx $15,000 or less after 5yrs (depending on kms and condition).

This means that your $40,000 is now worth $15,000.

Put in place that during this time you might have saved another $15,000 (remember a lot of people, but not all people spend what they have in their pockets and their lifestyle normally builds up to their disposable income, hence savings drop off).

This now means your $40,000 has turned into $30,000, you are now minus $10,000 from your original savings.

However, if you think of a finance or a loan as forced savings, what you would do (if payments are affordable) is borrow the $40,000.
Why??

Let’s say, you put your $40,000 in to a fixed Interest account and you achieve 5% interest on your money for 5yrs ( the term of the average loan) paid monthly, your $40,000 has tuned into approx $52000, plus you still have your vehicle worth $15000.

This means after 5 yrs you have $67000 ($52000+$15000),sure you have paid a loan off, but your loan has worked like forced savings, giving you a benefit.

Of course these figures are approximates, and there are lots of different scenario’s, but in general hopefully you get the idea.

The main thing is, that Australia’s Interest rates are at an all time Low and this is the time we should take advantage of this.

As always here at Steve Elliot Financial Services we will always strive to get you the best possible deal.

We have been having great success for many yrs and also our car buying programme is saving clients thousands of dollars