NEW: Our personal finance expert Liam Croke answers your questions...

Liam Croke

Reporter:

Liam Croke

Email:

liam@harmonics.ie

NEW: Our personal finance expert Liam Croke answers your questions...

Should you use cash to buy a car? Liam doesn't think so

Q: I’m changing employers, but with a longer commute I need to change my car. While I have money from a termination payment, should I use it to buy a car for cash or take out a loan. I have €20k and the car I’m thinking of buying is €15k. What should I do?

A: Buying a car for cash can be a terrible investment.

And it isn’t an investment at all, but if you consider it as one, it might help you with your decision.

If I said to you, put €15,000 into an account, and I’m guaranteeing you in four years’ time it will be worth €3,000, would you invest? Of course, you wouldn’t. Why would you, put money into an account that is guaranteed to go down in value by 20% each year? It would be financial insanity. But that’s what might happen if you buy a car for cash.

If you finance the purchase, and pay a deposit of €3,000, the car is still worth c. €3,000 in 4 years’ time, but you also have €12,000 sitting in your account. Buying for cash, you have a car worth €3,000 but €0 sitting in your account, and whilst you paid c. €1,800 in interest payments, you have retained the bulk of your savings.

The only way you could match this strategy by using cash is by saving what the monthly repayment of a car loan would have been. Do you trust yourself to do this? If yes – use cash, if not, finance the purchase.