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A person called "Bob" is considering buying a car and financing it over 5 years. He has the option to finance the car with a maximum balloon payment of 30%. When financed the load will have an interest rate of 13%.

Bob also has a unit trust investment that historically (on paper) has had a growth of 15% per annum.

Which is the wisest choice for Bob to make:

  • Buy the car with the balloon payment and invest the difference, then at the end pay the balloon payment off; and luckily have some money left.
  • Buy the car without the balloon payment, fully financed

Bob isn't the best with finance so any other alternatives are most appreciated!

Edit

If in your opinion the difference between the investment growth and interest is too small to do the first option, then; how much should the difference be before the it starts to look like a good idea?

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  • This question appears to be off topic because it is about Bob's finances rather than personal finance.
    – dg99
    Nov 13, 2014 at 21:58

1 Answer 1

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That interest rate (13%) is steep, and the balloon payment will have him paying more interest longer. Investing the difference is a risky proposition because past performance of an investment is no guarantee of future performance. Is taking that risk worth netting 2%? Not for me, but you must answer that last question for yourself.

To your edit: How disruptive would losing the car and/or getting negative marks on your credit be? If you can quantify that in dollars then you have your answer.

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  • I totally agree with you. Bob is actually a friend, and this whole balloon payment scenario was brought forward to him by his financial adviser (which he followed). I basically told him the same as your answer here, and I really hoped that you would have backed the first option, but alas...
    – Barnstokkr
    Nov 13, 2014 at 16:48
  • I would never advise anyone to borrow against a car or house to invest money in the market. If I were Bob, I would ask the financial adviser what his commission is on any investment that he is offering.
    – NL - Apologize to Monica
    Nov 13, 2014 at 19:38

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