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Buy a car with $0 deposit! $0 driveaway!
After 5 years…
Hey, I cannot get rid of my car! I still owe the bank money even if I sell the car! But wait a minute, the car dealer says I can bring forward my old loan when I buy a new car! Wow, I have been eyeing that red hot sexy convertible and now it can be a reality. Just take a new loan!
Few months later…
Oh no, my car loan installment is more than I can handle. I need to sell my new convertible and take bus. And what! I will still owe the bank so much $$$$$$?
Do you think the above scenario is exaggerating? Excerpts from an article, ” Fewer new cars being scrapped” (30 April 08 issue of The Straits Times):”…many current owners are saddled with high car loans, some of which exceed the purchase price of the car and are stretched over a 10-year period.’…Take the example of a two-year-old Hyundai Getz with a scrap value of around $20,000,’ said MrTang. ‘If the buyer had taken a 10-year loan, he would still be owing the bank more than $30,000. So how to scrap?’”This is serious… do not get yourself ruined financially. These dealers (collaborating with banks) are luring your desire for instant gratification. DO NOT FALL FOR IT!
But how do you know how much you should borrow? Before we go any further, you should read an earlier post, “What car can you afford?“To know how much to borrow or how long to borrow, you have to know when you plan to scrap or sell your car, and what is a comfortable figure for your monthly installment. First, you have to ensure the breakeven (proceeds from sale of car = loan redemption amount) is to at least coincide with the time you scrap/sell the car, and of course, the former should be as early as possible than the latter. The main reason is not to top up the balance when selling the car. Imagine you have to pay to sell your car! Many people tend to make the mistake, thinking that they can afford a better car by taking a higher loan at a longer period. The problem comes when they change their car before the breakeven point, where they would lump the outstanding loan amount (from the old car) with the new car loan. Thus, allowing banks to charge them interest again on the “leftover” from the previous loan.
To summarize,
1) Determine how long you want to keep the car
2) Make sure your breakeven point occurs before (1)
You must be asking how do you calculate your breakeven point? To spare you the mathematics, you can use oneshift.com car loan calculator. After you enter the car model and change a few values, scroll down to find your breakeven point from the tabulated results. The row is yellow in color.
If you want to understand what are the components and mechanism behind this calculation, you can take a look at “Cost of car ownership in Singapore“.
