New Car - Personal Loan or Use Money from Offset Account?

frostee on 27/08/2017 - 09:28
Last edited 27/08/2017 - 15:32 by 1 other user

I can't work out which option is better

Car is $25k. We easily have enough to take the cash from our offset account. Obviously this will affect the interest we are paying on our mortgage (currently 3.5%). I'm trying to work out if long term we are better off financing the car. The dealer offers 8% over 5 years or the more likely option is a personal car loan with 6.5%.

How would one go about working out which one is better? Cash makes sense to me but possibly the interest saved on the mortgage makes finance better?

Financial

Comments

    • frostee on 27/08/2017 - 09:36

      I'm leaning towards this option. I'm just not sure how to do the math to factor in long term cost on the home loan. Recently me and my partner have been lucky enough to get a decent pay rise so we think we can pay the mortgage off rather early.

      • redfox1200 on 27/08/2017 - 11:37
        +5

        if you can pay the mortgage off early then use your offset account to pay for the car, obviously you are planning to put extra into your home loan to pay the house off early??

      • y on 28/08/2017 - 16:52
        +33

        Find out what the monthly repayments on the 6.5% personal loan would be.

        Buy the car with cash from your offset account and make the same repayments, but into your offset account.

        This way you will pay off the car much sooner and having paid much less interest.

        This is definitely the correct option, it makes no sense whatsoever to take out a 6.5% loan if you already have the money sitting there in an offset.

        • DisneyPrincess on 28/08/2017 - 22:42
          +2

          I wish I could + this comment more than once!! I couldn't agree more, this is the only option that makes sense to me.

        • berry580 on 29/08/2017 - 09:45
          +2

          The above is spot on.

          Obviously it's assuming your homeloan rate is lower than the personal loan rate.

          There's also the extra fees the Baku would charge you for the personal loan like application, account keeping, fees etc.

    • y on 28/08/2017 - 16:53
      +11

      This is terrible advice

  • Slippery Fish on 27/08/2017 - 09:42
    +27

    3.5% potential saving vs 6.5-8.5% cost…

      • Slippery Fish on 27/08/2017 - 14:11
        +7

        I thought it reduces the interest of that amount not the whole loan??

        • frostee on 27/08/2017 - 16:56

          Offset account so everything in that account is considered as on your loan, hence the desire to maximise the amount in the offset particularly now with low interest rates and us being at the start of our mortgage.

        • Slippery Fish on 27/08/2017 - 18:27

          @frostee:oh ok? Thanks.

        • [Deactivated] on 28/08/2017 - 10:18
          +2

          @frostee: Yea so the 3.5 that you save is only on the money that you take out from the account.

      • srnoz on 28/08/2017 - 10:04
        +6

        I consider like this.

        If I have 25k on offset and take out a car loan @ 5.44%, I'll be paying 1.94% more interest on that 25k (if home loan rate is 3.5%).

        Calculated with Esanda calculator and looks like it would cost around $1250 more over 5 years.

  • Skramit on 27/08/2017 - 09:55
    +3

    Use a spreadsheet.

    Work out interest paid on your home loan for the two different offset scenarios for the remainder of your loan. Then calculate the interest on your car loan and compare.

    Based on my rough sums when I was in the same situation a few years ago, it's nearly always better to keep the money in your offset in the long term assuming your mortgage is a decent amount. But it's also not going to be a huge difference either way.

    Both scenarios have pros and cons from a practicality point of view.

  • foxmulder on 27/08/2017 - 10:01

    Your home loan amount?

    • frostee on 27/08/2017 - 10:04

      340k owing but 60k in offset so currently 280k owing

      • foxmulder on 27/08/2017 - 19:31

        Thanks. See my spreadhsheet in new comment.

  • demiurge on 27/08/2017 - 10:15
    +54

    You can't work out if 6.5 is bigger than 3.5?

      • demiurge on 27/08/2017 - 10:44
        +26

        It's exactly the same. Any amount out of your offset is 3.5%.

        • demiurge on 27/08/2017 - 11:15
          +32

          @oscargamer:
          There is a difference because you are dragging the 25k loan over 25 years instead of 5 years. If OP really pays off the 25k on his homeloan over 5 years he would save a lot more. Think about that this way, by having two loans OP has to pay more per month, however if he repays the same amount he would pay on two loans, all into his mortgage, he would be better off.

        • oscargamer on 27/08/2017 - 11:29
          +1

          @demiurge:

          i agree with you, but 99% of people who pay for cars out of savings/offset accounts, do not make repayments into the offset at the rate they would if they got a classic car loan

        • [Deactivated] on 28/08/2017 - 10:19
          +6

          @oscargamer: Perhaps then they should. The money in and out is still the same right. The person just has commit to it.

        • srnoz on 28/08/2017 - 10:28

          @oscargamer:
          Yes. This is assuming 25k is spread over 25 years. But OP would be settling 25k car loan in 5 years putting OP on additional financial burden for that 5 years.

          If OP can workout a plan to pay the additional 25k to his offset over 5 years, OP would be better off than a car loan.

        • MrTweek on 28/08/2017 - 11:06
          +6

          @oscargamer:

          So, the only difference is that you don't believe op will be disciplined enough to pay the car "loan" back to his offset account?

          That's not really a financial question and has nothing to do with all you calculations. Mathematically, it still comes down to whether 6.5% or 3.5% is more.

        • T1OOO on 28/08/2017 - 13:11

          @oscargamer:

          Where's inflation in all this ?

        • gezza90 on 29/08/2017 - 07:54
          +1

          @oscargamer: Change the term to 5years on BOTH and you'll see it's cheaper to use offset. If OP can pay personal loan in 5 years, then he can also pay 25k in his offset in 5 years.

          I can't believe we're having this discussion on an Ozb site. This is a no brainer.

      • Donaldhump on 27/08/2017 - 11:17
        +24

        The amount is exactly the same

        Pay 6% to dealer or 3.5 to bank, how hard is this to solve!

        The only time you lose will be if the home loan rate goes above 6.5 which it won't in the short term, and doubt it will ever…not for st least 10 years.

        No brainer

        • taoz on 28/08/2017 - 12:04
          +3

          Agree.
          It's no wonder why banks make so much money…..
          This is basic stuff, yet someone's considering borrowing money at a higher rate than money they already have access to a a lower cost

        • poboy on 28/08/2017 - 15:24
          -1

          Why do people keep upvoting 'its simple'?

          No. Variances in loan period and human nature mean that it's not simple.

        • Skramit on 28/08/2017 - 16:00
          -4

          @Dozingquinn:

          Precisely. There's some shithouse advice happening in here.

        • y on 28/08/2017 - 16:48
          +4

          No, it really is simple, the offset is the definitely the correct answer. The only way OP could be worse off is if he takes the money for the car out and makes no additional repayments, which would leave him paying 3.5% interest on the value of the car for the life of the mortgage.

          If he simply makes the same repayments the 6.5% personal loan would require into his offset, he will be much better off.

          It makes no sense in any circumstances to take out an extra loan at 6.5% if you already have the money sitting there offsetting a 3.5% loan.

        • dazweeja on 29/08/2017 - 08:54

          @Dozingquinn:

          So if the ability of the OP to stick to his repayments from the offset is in question, why not the ability of the OP to meet his repayments on the personal loan and not incur extra fees or interest?

          Surely it's prudent to just answer the question in the financial sense otherwise the question can't be answered at all. And in a financial sense, it's simple.

      • SeVeN11 on 30/08/2017 - 01:08

        I feel for you… you seem like you are genuine, but the Australian system has clearly let you down because it didn't teach you (or anybody else for that matter) any financial literacy…

    • Skramit on 27/08/2017 - 10:53
      -2

      It's not that simple :)

      • demiurge on 27/08/2017 - 11:15
        +36

        It really is.

        • Donaldhump on 27/08/2017 - 11:18
          +2

          Agree with you,

        • dbui8743 on 28/08/2017 - 09:49
          +2

          Agreed. It really just simple math.

  • Ocker on 27/08/2017 - 10:40
    +10

    You need to also factor in the extra cost that most (if not all) insurance companies charge for a car that is under finance.

  • Some Human on 27/08/2017 - 10:41
    +13

    If the checkout's taught me anything, you're better off adding it onto the mortgage at the lower rate as long as you pay it off in the same amount of time you would have on Finance. If you're going to tack it onto the mortgage and then take 20 years to pay the car off, it will cost more than finance.

    • oscargamer on 27/08/2017 - 10:57
      +3

      yep, totally correct. but who actually does that?

      • BartholemewH on 28/08/2017 - 21:39
        +4

        Financially responsible adults?

      • Cheshire Cat on 30/08/2017 - 01:39
        +1

        the person who has easily saved that much in their offset account currently is exactly the type of person who will actually do that….i.e. OP in this instance. they are a proven saver so it really is just simple maths of one loan > the other.

    • skyva on 29/08/2017 - 14:36

      There is a principle in finance that you should borrow to match the life of the asset, for depreciating assets at least, so for a car.
      That way if life changes, and you want to sell the car at the end of year 2 instead of year 5, the outstanding hopefully matches the value of the car.

      Do not take a 30yr (home) loan for a car. You will still be paying off the car for 25 years after you sell it.

      So work out how long you will have the car, then price a loan for that amount. EG $20k for 5 years at 6.5%. Decide if you can afford the payments.

      Then:
      If you have a track record of being diligent with money (not just thinking maybe I will be better this time) put it on the mortgage and make the mortgage payments plus the amount you calculated for a stand alone car loan. You may be a $1000 or so in front.

      Or (safer)
      Do the car loan separately and pay it off as per the schedule.

  • sahh on 27/08/2017 - 10:41
    +1

    Also factor in the discount in price when paying cash, negotiate this with the car dealer

    • oscargamer on 27/08/2017 - 12:11
      +8

      that is not relevant these days

    • Aussie Smurfette on 28/08/2017 - 08:43

      Paying cash gives you less discount than finance. There is less money for the dealer if you pay cash.

    • frostee on 27/08/2017 - 11:14
      -7

      So go the car loan? The Ozb community seems very divided on this issue going by the comments!

      • Skramit on 27/08/2017 - 12:20
        -3

        To be honest it's much of a muchness. Don't stress over it. Go with whatever method suits your needs for offset account cash verses spreads out the cost over a few years.

    • MrTweek on 28/08/2017 - 11:11
      +1

      over the life of the loan

      But why would they pay it off over the life of the loan?
      Op said they are prepared to pay off the car within 5 years which makes the offset account a lot cheaper.

  • [Deactivated] on 27/08/2017 - 11:20

    Just enjoy your new car and don't stress the small stuff.

  • Slippery Otter on 27/08/2017 - 11:42
    +9

    I had the exact same discussion with a friend who somehow worked out that it was cheaper to take out a car loan instead of withdrawing from his offset. I found that bizarre.. It's always cheaper to withdraw from offset and pay it off in the same time frame as you would if you took out a car loan.

    • Your Friend on 28/08/2017 - 16:32
      +11

      your friend is a moron

      • MetaphorOZB on 29/08/2017 - 11:07

        I think the part of this discussion that is getting heated comes down to the financial responsibility/discipline of OP.

        If he wasn't disciplined and would not pay back that $25k loan into his mortgage offset in 5 years and wouldn't make extra repayments at all over the life of his home loan, getting finance through the dealer would make sense.

        However OP has stated a significant increase in income and therefore ability to repay the home loan much earlier than the term, so it makes sense to take the money from the offset account.

  • Woodinski on 27/08/2017 - 14:28
    +3

    The lower interest rate is always better with the same repayment amount.

    All things kept the same (interest rate and repayments) you will be about $35-$40 better off a month paying it out of your offset account. This assume you would make the equivalent car repayment amounts into the homeloan account in addition to any normal home loan payments.

    However, if you are looking to pay the minimum repayments on the home loan after withdrawing the amount for the car (i.e. over 30 years) you will be worse off (higher total interest bill at the end of the process).

    I suggest you work out what your repayments for the car are at the personal loan rate, with draw the amount from your home loan account and then look to pay your monthly homeloan repayment + the calculated car repayment amount back as a minimum each month (for a period of 5 years at least). You will work out better in the long run this way (~$2000).

    Additionally, depending which insurer you go with, if you have a personal loan on your car you will have a higher insurance premium. More reason to pay outright.

    • frostee on 27/08/2017 - 16:51
      -1

      Thanks for the info. At present we easily have enough coming in to pay mortgage plus the car and plenty more. Likely to pay the home loan off in maybe 7 years? How does this change things?

      • abb on 30/08/2017 - 09:13

        How does this change things?

        You get a gold star sticker.

  • ninjawarrior on 27/08/2017 - 18:05
    +39

    Honestly a little ridiculous there's any serious debate going on here - please read what demiurge / unclesnake / Woodinski are saying above. 3.5% < 6.5%, end of story.

    As we are talking about an offset account, assume all of your spare cash after living expenses would be going in there anyway. The argument that people are putting forward: "it will cost you more if you take it out of the offset for the full 25-year term, compared to a shorter car loan" is only applicable if, for some reason, you had money which you were not storing in your offset account, but which you could use to pay off the car loan.

    • smpantsonfire on 28/08/2017 - 09:24

      This should be top comment.

      Actually paying Car payments on top of Mortgage repayments are irrelevant when all the money goes into the offset account anyway.

      Offset accounts give you the best interest rate you can get, period.

  • foxmulder on 27/08/2017 - 19:31
    +2

    I tried to come up with spreadsheet and basically the same thing.

    See spreadhseet: https://www.dropbox.com/s/3i1t68s93xokt51/170827_Car%20with%…

    Let me know if I do it wrong.

    • frostee on 27/08/2017 - 20:05

      This is great! It makes sense to me.

      If I put in the figures, take the total interest paid back with the cash payment then compared to total interest paid with car loan + mortgage it comes out $1,906.42 to do the advance payment.

    • bigticket on 27/08/2017 - 23:27
      +2

      As others have said, it a no brainer, 3.5 <<<<< 6.5

      ninjawarrior is spot on in his comments. Doing a spreadsheet is redundant.

      Your spreadsheet is incorrect anyway. You have NOT added the monthly interest to the principle in your calculations. That amounts to a interest free loan.

      • foxmulder on 28/08/2017 - 08:02

        Hi column D and K are interest for home loan principal.

    • trev likes bargains on 28/08/2017 - 22:54

      Foxmulder, you need to add the total interest for the two tables. Then it is clear that the separate car loan costs more

  • Cheapskate Paul on 27/08/2017 - 22:09

    Getting finance from a car dealer is the most expensive way to pay for a car. Car dealers get huge commissions for selling finance, so guess who pays for that. Hint: It's not the car dealer or the finance company!

    • [Deactivated] on 28/08/2017 - 00:10
      +1

      so guess who pays for that

      I know. It's that guy that washes all the cars in the yard just before it rains. Am I right?

    • spackbace on 28/08/2017 - 01:03
      +1

      Coz it's not like the banks don't make huge profits or anything…? ;)

    • kingmw on 28/08/2017 - 22:39

      When I last checked it was a $500 instant commission to the Honda car dealer for finance. May be even higher for more expensive cars.

  • casho on 28/08/2017 - 08:40
    +6

    Buy an $80k car and then it's an investment. No brainer ;-)

    • [Deactivated] on 28/08/2017 - 08:55
      +1

      But it has to be a VAG I believe

      • casho on 28/08/2017 - 10:41

        Ah well perhaps an old Ferrari or Lambo would be a better investment? Nar crazy talk, ignore me ;-)

    • h4zey on 28/08/2017 - 11:59
      +1

      this is getting old we need a meme out of this!

  • victorheaven on 28/08/2017 - 09:27
    +1

    I'm actually interested in where you got your mortgage for 3.5%?! The lowest I can find is 3.75%

    • frostee on 28/08/2017 - 09:40
      +2

      Certainly - it is through loans.com.au @ 3.49% actually. It might be changing to something similar to what you have said though

  • cmafra on 28/08/2017 - 09:40
    +5

    step 1. the best option is to not buy a new car as is a highly depreciating asset. put the money on your home first.

    step2. if you absolutely cannot do that, you should pay talk to the dealer (which is the worst loan scenario) and ask for a schedule of the payments, keep that but DONT close the deal.

    step 3. Go and do yourself a big favour, take the money out of your offset account, and repay your loan on your offset account to yourself at the same way your dealer schedule was done on step 2.

    • frostee on 28/08/2017 - 09:41
      +2

      I should point out it isn't a new car. 2013 Subaru Forester XT :)

      • egads on 29/08/2017 - 12:40

        Nice. Premium? Been looking at some aswell. Kms around the 50-80k mark.

        • frostee on 29/08/2017 - 12:45
          +1

          No premium but yes around that KM mark. The premium had some nice features but also had plenty more electronic gizmos that might break (powered tailgate, powered seat adjustment etc.)

    • sghetti on 28/08/2017 - 11:30

      Step 1 is way off if it's an $80k sports car. They are considered a high yield investment these days…

      • h4zey on 28/08/2017 - 12:01
        -1

        that will depend on whether or not you are working for westpac

        • Yarra Warrior on 29/08/2017 - 14:00

          This is totally ROFL comment. I recall this discussion long time back on a guy who started this topic. It's unbelievable to think of why this is deemed as a high yield investment especially for people who is working in the banking industry. This is really no brainer, LOL.

  • [Deactivated] on 28/08/2017 - 10:24

    If you feel that your raise is significant and you think you can afford the car.

    Put aside that extra money (as you would if you have purchased it now) for half a year then revisit your decision again.

  • Peck on 28/08/2017 - 10:43

    Offset money, but tighten your belt and pay it back to yourself over 4 or 5 years. Don't fall into the trap of milking your offset account and living a 'higher' life than you should.

  • KP2015 on 28/08/2017 - 12:10
    -1

    How about going for a cheaper car? Maybe set a 15k budget, as you said - pay the mortgage off quicker and once you're down to a reasonable amount on your mortgage then go out and buy a better car. Cars depreciate in value, if you can just make a small sacrifice for a little while you'll benefit later along down the line.

  • The Wololo Wombat on 28/08/2017 - 12:42

    No. Don't listen to anyone else but me. lol. Seriously, they don't know what they are talking about.

    100% use your existing money, in the offset.

    The 3.5% is ONLY off the $25k you take out (not the whole balance, offset accounts work by reducing the principle), so that's $875p.a. in 'lost' interest reductions.

    Compare that with 6% loan which is $1500p.a.

    Now, I get that you are comparing 5 years at 6% with 25 years at 3.5%…. but that's erroneous: You are forgetting that you still have to pay back the loan!! So where is that money going to come from? It'll either come from the offset, or earnings that would've otherwise been saved into the offset account. Right?

    So, there is NO reason why you should get a loan lol!!

    BUT, there is one situation you may not have thought of: Buy in a salary sacrifice package so you can pay in pre-tax dollars and pay it off over time, sometimes without interest.

    • TailsK on 28/08/2017 - 13:25

      Salary packaging often has an interest component. This usually means that the total amount you spend overtime, is about the same. If you're looking to change your car frequently, it may be a good option. If you have the cash on hand, and want to keep your car long term (5 - 10 years), buying upfront is a bit better. At least it was for me.

  • TailsK on 28/08/2017 - 13:22
    +4

    Hello,

    There seems to be a lot of confusion in this thread. First of all, if you can afford a new car, and you want a new car, don't let people deter you. With regards to paying for the car itself, you really have three options:

    Option 1 - You purchase the car outright. This means you pay no interest on the car, and you reduce the amount of offset you have against your house. Because you have spent $25,000 of your offset, you are effectively paying 3.5% interest on $25,000 to purchase your car.

    Option 2 - You take out a $25,000 loan against your home, to pay for the car. There are two main things to consider here:

    • You will likely need to increase your loan repayments to cover off the extra amount you have borrowed.
    • Some banks allow you to have multiple loan/offset accounts. So what this means is you can have a separate loan account for $25,000, with a separate offset account for the $25,000 you have. Effectively you have a 100% offset loan, that can pay itself off. You could make this loan a 5 year loan, to pay it off faster.
    • Although your repayments will be higher, because you are borrowing more money, it is still ultimately costing you the same as option 1, as you are still offsetting the full $25,000. This may or may not be relevant to you, but if you ever plan to use your house as an investment in the future, splitting the car loan into its own account will simplify your taxes in the future, if your home becomes an investment property.
    • Keeping in mind point 2, the big advantage here is that the $25,000 (or what is left as you start making repayments), is still fully accessible to you, if you ever really need it. This then becomes a question of how disciplined you are with your savings, and whether or not you will find yourself dipping into the offset.

    Option 3 - Get a car loan. This isn't a great idea, because they often have a higher interest rate. It will cost you more in the long run. You are better off taking advantage of your offset.

    The actual amounts don't matter. What matters is the interest rates. Options 1 and 2 have the same interest rate. Option 3 will likely have a higher interest rate. I would recommend option 2 if you're confident you're not going to spend the money.

    Feel free to PM me if you want me to explain further.

  • antonthenet on 28/08/2017 - 13:54

    Everyone saying that the 3.5% is the best option are correct, but there are two examples where it may not be.

    1. If you would need that $25K for something else in the future. One you've spent the $25K you aren't getting it back unless you sell the car. With the loan you don't outlay the $25K straight away and can pay it off over the set terms of the loan.

    2. If the car will be used for business purposes you can claim the interest (just interest, not the repayments) as deduction using the logbook method. Sometimes this can be beneficial especially if you need the 25K for something else.

    • ChickenTalon on 29/08/2017 - 08:29

      No, offset is still better in both of those scenarios.

      1. Probably cheaper to re-finance the home loan if you really need the extra 25k. If your situation is such that you're geared very highly and can't get a home loan refinance, then you're likely to be turned down for the car loan anyway. You're paying a lot of extra money to borrow that 25k against a car, instead of a house.

      2. Assuming the top tax rate for the OP of 45% (>180k income). A tax deduction on the 6.5% interest still has an effective rate of 3.575% which is still above 3.5%, plus any establishment fees in taking out the car loan. And that assumes 100% of the car is used for business purposes, unlikely you'd buy a car purely for business with your own money. If you were the owner of the business maybe, but then you'd get the business to pay for the car with pre-tax money.

      try again.

  • frostee on 28/08/2017 - 14:06
    +7

    Thank you all for the (mixed) opinions - I've gone the cash option as it made sense after the comments here. We are extremely disciplined with our savings, hence the ability to get the car and still have zero worries about the mortgage.

    And everyone stop panicking - the car is used not new :)

    • folken on 28/08/2017 - 16:30

      That's what I've done with my cars. Paid cash from offset. As long as you're on top of your repayments (i.e. paying extra) you'll be fine.

      • ShortyX on 29/08/2017 - 11:38

        Whilst technically not correct, is it right to say 'paying extra' is the same as leaving the 'savings' in the offset?

        • folken on 29/08/2017 - 12:17

          You're right. That's what I meant to say 🙂

  • mad__llama on 28/08/2017 - 14:38

    For a car of that price I would consider looking into a citibank rewards platinum credit card with the maximum limit and 2 year interest free balance transfer. Ask for a cash check-to-self for the balance transfer - effectively an interest free, 2 year loan (minus the annual fee and 1.5% BT fee).

    Make sure you pay it on time every month and don't use it for anything else! Then keep balance transferring to other cards (preferably with lower annual fees) until you pay it off. A bit more work but might work out better for you?

  • OzzyOzbourne on 28/08/2017 - 15:08

    There are numerous online interest calculators and loan apps for smart phones. Really easy to work out yourself.

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