Your currency: Car deposit vs lump sum investment

I’m considering buying a new car. I’m looking to keep the vehicle for a long time, so I want something reliable with modern features. What are the pros and cons of using a large cash sum for a significant deposit (R100,000 on a R350,000 vehicle) versus investing that money and financing the entire vehicle amount? Which approach offers a better long-term financial outcome?

Dear reader,

It’s an interesting question, and one that we often hear from our clients: what is my opportunity cost of paying off debt versus investing the funds? There are several trains of thought to consider but, ultimately, the answer depends on several key variables: your investment horizon, appetite for risk, expected returns and prevailing interest rates. Let’s consider the options:

Option 1: Use the R100,000 as a deposit

Pros:

Lower monthly repayments: a R100,000 deposit reduces the financed amount to R250,000. Assuming a five-year loan at 11% interest, your repayments could fall by more than R2,000 a month compared to financing the full R350,000.
Reduced interest burden: you’ll pay less interest over the life of the loan, potentially saving tens of thousands of rands.
Improved approval terms: lenders often offer more favourable interest rates when the borrower shows financial commitment via a significant deposit.
Peace of mind: lower debt means less financial pressure.

Cons:

Capital is tied up in a depreciating asset: according to insurance.co.za, a vehicle typically loses 10% right away and 30%-40% by year five. R100,000 would probably be eroded by depreciation faster than it would have in an investment portfolio.
Lost investment opportunity: the money is no longer earning potential returns elsewhere, especially if you are in a strong financial position and could otherwise achieve higher returns in the market.

Option 2: Invest the R100,000 and finance the full purchase

Pros:

Potential for higher returns: if you invest the R100,000 in a balanced or growth-oriented portfolio yielding 9%-12% a year (net of fees and taxes), the long-term capital growth could outperform the loan interest (especially if the vehicle loan is at a competitive rate).
Liquidity preserved: depending on the investment structure, maintaining your capital invested allows for flexibility and access to funds in the event of an emergency or an opportunity.

Cons:

Higher total debt obligation: financing the entire R350,000 means higher repayments and a greater total interest bill.
Investment risk: market volatility could result in negative or low returns, particularly over a short time frame.
Psychological burden: some individuals are uncomfortable carrying debt, regardless of financial logic.

Deciding between paying off debt and investing is rarely a straightforward choice. If you do not have other liquid emergency funds available, it may be wiser to finance the majority of the vehicle sum and preserve your cash to maintain quick access in case of an unforeseen expense. However, if you already hold sufficient liquid assets or accessible investments, reducing your debt burden could be the more prudent option.

Sean Kelly is a wealth adviser at Parity Wealth Managers.

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