## Sunday, March 4, 2012

### Use Home Loan to Buy Car ?

Matthew is refinancing his property @ 4.2%.  He will have an extra \$100k.  So he is planning to buy a \$100k car too.  The car loan is offering him 2.88%.

Should Matthew use his home loan to buy this car or should Matthew take the car loan ?

Assumption : 7 years loan

Reason 1

If you take home loan approach, your monthly repayment is \$1,376.11
If you take car loan approach, your monthly repayment is \$1,430.48

You will have a better CASH FLOW
with the home loan approach.
You pay less.

Reason 2

If you take home loan approach, you have paid a total of \$115,593 after 7 years

If you take car loan approach, you have paid a total of \$120,160 after 7 years

You save a total of \$4,567 with the home loan approach.

So either way you analysis the comparison, it is BETTER to use the home loan to buy the car instead of getting the car loan.

WHY ?  How can this be possible ?  How can 2.88% worst than 4.2% !?!?  The answer is all in an old post.  In short, car loan rate is 1.9x equivalent to home loan rate.  So in this case, 2.88 x 1.9 = 5.4 which is higher than 4.2% ( home loan ), hence this particular car loan is not better than this particular home loan.

However . . .

1.  The home loan is NOT a 7 year loan.  Above analysis is only valid if Matthew top up \$1,376 monthly repayment to his 'flexi' home loan.  Else continue paying original repayment amount would drag this extra \$100k loan to 30 years, that will make home loan a losing deal.

2.  his home loan offer is actually BLR - 2.4%.  So if the BLR raise above 8% one day before the 7 years period, this may become a losing deal again in future.

The world is fair and balance, in this particular case, it is obvious scientifically better to use home loan to buy the car instead of getting another new car loan ie. a saving of 4.5k plus.  However, it does come with certain risk ie. future BLR rate and a requirement - discipline top up repayment.