Why you should not borrow to buy a car

I bought my first car (a blue Toyota Premio) back in 2010 at ugx 12m. The car is still in my possession and is now used as a delivery vehicle for our food condiments manufacturing business. The most expensive car I have driven cost me ugx 15m. I paid cash for these cars! I have never been one to be excited by cars which seems odd to many people because I can easily afford to drive relatively nicer cars.

One reason is that I am a trained accountant who is also keen on achieving financial independence as quickly as possible. I clearly know that a car (especially a personal car) is a bad investment. This is because cars rapidly depreciate and in accounting, we reduce their value each year. This is unlike other assets like land or shares which tend to appreciate with time.

So cars are not investments. Yes, they are necessities to move you around but they should not be considered good investments. The clothing you are wearing is essential but is not an investment.

To achieve financial independence we must acquire assets and reduce liabilities. So the idea of buying a car which is a bad investment using borrowed funds runs counter to the logic of trying to build wealth quickly.

Let me demonstrate. Suppose you acquire a black shiny Toyota Harrier (2010 model) for about ugx 60m and you use a five-year credit facility at say 22% interest rate per annum. Within five years you will have repaid a total of ugx 99.6m with a monthly repayment of ugx 1.66m. The total interest cost would have come to ugx 39.6m (this figure excludes all the loan fees including arrangement fees and insurance). In five years the value of your car will probably be less than ugx 30m. So in essence you have a driven a nice comfy car but it is a bad investment and you have lost money.

Now what if you had invested the ugx 60m in a simple Unit trust earning 11% per year? This investment would have grown to ugx 101.1m in five years. So you can clearly see that investing the cash in a real investment is better than buying the car.

Of course, some people will argue that cars are necessary and you can’t really do without one. I would definitely agree with these people and suggest to them to buy more affordable and reliable second-hand cars. I would also encourage them to save slowly and acquire the cars using cash rather than using credit. Alternatively, they could raise at least 60% of the car value and borrow only 40%.

We can see the logic behind my argument, but we all know that most people don’t make financial decisions logically. Most of us use emotion. We go to a car bond and fall in love with the prettiest car we can find which will make us look good among our peers, friends, and family. This traps us into buying cars we can’t afford and taking on unnecessary debt.

However, achieving financial independence requires us to sacrifice and be modest with our money. This way we incur some emotional pain in the short run but smile all the way to the bank a few years down the road.