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Originally Posted by totoseow
what i m gonna say may offend some people, but i firmly believe that if u hv to take a loan to buy a car..u cant afford it. there is only 1 exception; that is when u r convinced that u can beat the effective interest rate or APR. how many of you can say that?
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Disagree.
It boils down to the opportunity cost of the loan quantum.
Example - a $250K car. An 80% 5-year loan will incur a total interest payment of $28,000 at 2.8%. What could the the $200K have yielded? It depends on investable opportunities. Over the last three years, the yield of the $200K - from stock market or properties - could be enormous. Not saying an investment portfoilio of $200K is huge, or that $200K could buy a property, but given the margin nature of local investments, the return on the $200K is tremendous, if the owner has the investing acumen. Even a conservative portfolio would have earned an average of 4.5% - 5% dividend yield over the last 2 years, not taking capital gain into account.
The exception is a pocket so deep that $200K loan quantum seems so insignificant.
Of course, if the loan quantum has no opportunity cost, i.e. a prolonged poor investment environment with poor risk/reward ratio, then paying the full sum makes sense. However, who could time the investment environment? Given that most car buyers take a bigger appetite for cars only when things look good (no layman will commit more when they fear recession and retrenchment in the horizon), it always inherently means they will wanna keep cash and liquidity ahead of any investment opportunity. In that mental framework, leveraging on car purchases makes more sense that leveraging on any other investment - stock market, business, or properties.