Is it better to get a loan for a Ferrari, even if you have the money?

Question

A friend of mine inherited about $200,000 a couple of years ago and he put it into the bank to get some percent of interest (about 5% according to him).

Now he wants to buy a $200,000 Ferrari to fulfill his dream. He believes that he doesn't need the money at some point in the future, and if he is in luck he will be able to sell the Ferrari anyway at a later point. This question is not about to buy the Ferrari or not. Also, other cost like insurance, gas, repairs don't really matter in this question.

Having the money in the bank, is it better for him to cash it out and buy the Ferarri, or keep his investment running and take a loan for the car?

I can't give him advise, and he also doesn't know anything about financing. His bank told him he could get a loan backed with his investments and the car itself. By doing it this way, he may still earn interest while having his car.

Is this basically all there is to it or are there other things to consider to make a decision?

Answer 1

As a generalization, you will not make money on taking out a loan. As another generalization, the thing most lacking here is solid finacial advice! 5% annual return with an investment total of $200k is not a great amount. There are many solid and guaranteed investment options that could be pursued with that amount that should return much better (I'd think 10-15% should be readily doable, though would potentially lock up the money for a couple years).

But back to that in a moment... since you don't mention which model Ferrari, or if it's planned to be a new car purcahse, there is some question to the exact amount to be spent. Regardless of the actual amount, it should also be remembered that this is a car with a very high cost of ownership (general maintenance, insurance, etc.) As such, there will be a good deal more needed beyond the actual purchase price.

For a new car loan, a rate of about 6% is fairly usual... though it sounds like it has been suggested to take a secured line of credit? Chances are this could get a better rate... but in the end, it's unlikely that it will be a rate better than he is currently getting. And this is the key issue... given better investing, it may well be less costly to use someone else's money, using your own to secure it. However, in this case, it's unlikley to work out as less expensive.

The other possibility would be to lease - which would make sense if long term ownership isn't planned (or if you can get a favorable enough buyout... sometimes possible on exotic cars if you are willing to look at a one or two year old car; but not always possible). In the case of a lease, you are paying interest only on the devaluement of the car as it ages during the lease. Overall I think leasing is a terrible way to go, as it almost always costs more... but again, given the right financial situation, it can make sense for some circumstances.

Answer 2

A own loan for an previous Ferrari would be somewhat confusing to locate. certainly, motor vehicle loans for brand spanking new Ferraris are uncommon. i think of you ought to fullfill your desires; connect the Corps, shop the money after which purchase your Ferrari. money.

Answer 3

The interest is say 6% a year and taxable.
The car loan is 10% a year and non-deductible.

He loses money on that loan. Only the bank (and the IRS) makes money in this deal.

Answer 4

Always get a loan to buy a car to save you from Income Tax later on. Find out first if the money is liable to pay tax.

Answer 5

Hes stupid thats wasting money you can get a nice BMW, Mercedes, or Lexus. I'm guessing hes young that is not wise to waste all that money when you can get a nice car for less and have some if you ever need it to be financially secure.