2 or 3 Steps to Avoid Car Installments All Your Life

[arabk]

Car payments, how to avoid them in 3 steps.

I was helping a young guy decide how to plan his car purchase. Patience and simplicity are key. Here goes...

My illustration went like this:
If you put R6,500 away every month for just ten months, you have R65,000 for a cash car.
I'm not suggesting he drive a R65,000 car for the rest of his life, but this is how you start without debt.
Then you can save the same amount again and trade up to a R100,000 car ten months later; and a R150,000 car ten months after that.

In just thirty months, or two and a half years, you can drive a paid for R150, 000 car, never having an installment, and never have to make car payments again.

One's monthly saving may be reduced the higher up you go the quality of car--as quality cars are nicer and can run well for longer.

How impossible is this for someone who wants money to work for him/her? Very possible.
There is no limit to the level of car you can own, if cars are that important to you.

You can logic this anyway you wish, the fact of the matter is that installments mess up one's financial future.
Only lenders/banks win in the debt game, long term. It is a zero-sum game. One winner. Logic says, if they win, that means you lose.
Who's money is it? Who's time and sweat; brain and brawn is it that went into earning your money? Yours!! It is time to behave like it.

Key benefits:
Long term dodging of interest payments will make/save you a whole lot of money. Trust me.
Interest payments are like a cancer to one's financial well-being.
You can invest or enjoy all that money you would have paid out to banks in interest.

Hang-ups:
"Oh, I already have car payments" - Well, you can start now or when you finish paying this car off; follow the plan for the next car. You'll be starting with something, that means you're ahead.
"I don't have R6,500 to save every month" - Wait longer periods, make it 15 months, then you need to save R4,333 a month... 20 months requires R3,250 to be saved monthly, and so on.

Share if you wish.

(This is from personal practice after having financed my first car and paid it off in 18 months; not theory)

Credits: The Total Money Makeover by Dave Ramsey.

Do you think you can do this?

 

[Hamster]

In just thirty months, or two and a half years, you can drive a paid for R150, 000 car

R6,500 x 30 months = R195,000

With R0 deposit, an interest rate of 12% and a monthly installment of R7,061.02 you'll have that car paid off in 24 months.

With R65,000 deposit and R4,127.09 pm you'll also have it in 34 months. If you increase the repayment value even sooner.

So....no. You're not winning this way in my opinion. But you are being taught to save and not just buy on a whim so there is that.

 

[ArtyLoop]

Or you can take it one step further and trade in second hand cars...

 

[arabk]

R6,500 x 30 months = R195,000

With R0 deposit, an interest rate of 12% and a monthly installment of R7,061.02 you'll have that car paid off in 24 months.

With R65,000 deposit and R4,127.09 pm you'll also have it in 34 months. If you increase the repayment value even sooner.

So....no. You're not winning this way in my opinion. But you are being taught to save and not just buy on a whim so there is that.

Thanks Hamster for your input.

What I'm taking from your correction is that in 30 months, I can afford an even better quality vehicle (perhaps a 2 to 4-year old)

When it comes to interest paid, is it not much better to receive it than pay it? I think you would prefer to receive interest than pay it--if you understand its nature well enough. More people should try earn more interest than they pay. It is quite nice actually.

I say interest paid to me is better than interest I pay to anyone, bank or no bank.

Never mind the sundry costs of being indebted: credit facility costs (R60) + the R9 VAT you have to pay monthly. That's R828 per year. By your example, it's only 0.97% of your overall cost of the debt deal: R169,464.48 (at R7,061.02 p/m). True interest is 12.977% + the 7.5% variable interest you would have earned as you saved up your cash (opportunity cost) over the period.

Never mind the 'registration costs'/on-the-road (OTR) fees (deemed illegal by NCR rules, ask BMW, they know);
Never mind the greatly diminished power to negotiate at the dealership with a sales executive wanting to meet his/her quota.
etc., etc.

The 'latte factor', the little money leaves you without being noticed that chips away at one's financial well-being. Going with the masses for reasons unknown to you is financially dangerous.

My final point is, it is not necessary to enter into debt for buying depreciating 'assets', like cars. Patience and discipline make this possible.

Cash beats debt when it comes to motor cars. Full stop.

I'm a novice on the bible, but most times the wisdom is just to direct to ignore: Prov 22:7 "The rich rules over the poor, And the borrower becomes the lender's slave."

In essence, loan agreements are enslavement agreements.

 

[KleinBoontjie]

Wat? You are talking to the top 5% of South Africa, who can afford to save that much. The rest earns that much.

 

[Hamster]

The interest paid on the first calculation (R0 deposit, 24 months) would've totalled to about R20,000.

So that's R170,000 total paid. The R20,000 difference is probably way less than you would've lost on the other vehicles.

Moral of the story though - buy well under what you can afford and pay it off quicker. For R7,000 pm you can buy quite an expensive car.

 

[Goosfrabba]

Well I have a 2008 Hyundai i10. It's paid off in October (hopefully sooner if I get a decent bonus) and although it's tempting to trade in, I'm not going to. I'm going to keep it for another 2 years at least and put the instalment away towards a handy deposit for when I do upgrade. My car has about 146 000 KM on the clock and can get a lot more mileage out of it if looked after.

With our public transport being so rubbish, having a car is a necessity sometimes. My i10 is still my first car and had no choice but to finance it. However, going forward I do have the choice of keeping it and saving to eventually buy cash. I definitely don't want to ever be caught up in the perpetual trade-in cycle (especially with balloon payments).
It's possible, requires discipline though

 

[arabk]

Wat? You are talking to the top 5% of South Africa, who can afford to save that much. The rest earns that much.

No, not really. Save and target lower--according to your financial strength. More patience may be required.

 

[Hamster]

/snip

In essence, loan agreements are enslavement agreements.

Good luck buying a house then.

You get good debt and bad debt. At the end of the day, whichever way you approach it, you have an asset, what you paid for it and what it is worth.

In your example you end up paying more for a car that is worth less but newer.

If you just went for the loan you would've had the car instantly, saved over R20k over and above the depreciation and repair costs and not suffered the effects of inflation (R150k car now is a more expensive car than a R150k 30 months from new).

But yes, your solution keeps you debt free. It's called trading up.

 

[UrBaN963]

This is useless advice for the majority. How many people can afford their average monthly expenses including an additional R6,500 for a future vehicle?

Bright savings plan:
1) Save R2 million a month for one month and you can buy a R2 million rand house, cash! Never pay installments! (Legal and bank fees not included).

 

[C4Cat]

This is useless advice for the majority. How many people can afford their average monthly expenses including an additional R6,500 for a future vehicle?

Bright savings plan:
1) Save R2 million a month for one month and you can buy a R2 million rand house, cash! Never pay installments! (Legal and bank fees not included).

As he said in the OP it doesn't have to R6500 a month (I can't afford that) - you can do less over a longer period.

"I don't have R6,500 to save every month" - Wait longer periods, make it 15 months, then you need to save R4,333 a month... 20 months requires R3,250 to be saved monthly, and so on.

 

[supersunbird]

The problem is if you have to have a car for that first job... just not overextending yourself does a lot for your future.

 

[Adenoid Hynkel]

You get good debt and bad debt.

There is no good debt. Debt that traps you to a job is not good debt.

 

[RedViking]

I agree cash is better. But your calculations doesn't make sense. You gonna start your job with X salary. To do your job you need to get to work and back and you might even need a vehicle to do your job. You might be able to push it for the first month or two catching a lift, but then you need a better solution. In come taxi or bus fees.

So it is gonna be R6500 (damn) + R3 000 transport fees (or whatever) for the time you save. Not everyone has R10 000 a month they can just put aside for transport & savings, specially on that first job.

I do however think these chops that get themselves a GTI on their first salary but don't have money for a flat, petrol or maintenance, need to suffer a bit.

 

[SauRoNZA]

R6,500 x 30 months = R195,000

With R0 deposit, an interest rate of 12% and a monthly installment of R7,061.02 you'll have that car paid off in 24 months.

With R65,000 deposit and R4,127.09 pm you'll also have it in 34 months. If you increase the repayment value even sooner.

So....no. You're not winning this way in my opinion. But you are being taught to save and not just buy on a whim so there is that.

Not to mention if you had no car to start with you’ve lost the earning potential afforded by a car for 10 months.

Last I checked having a job that affords you R6500 odd to save on the side for a car....pretty much required a car to get the job done in many (but not all) cases.

The finance option puts the car in yours hands on day one.

The real trick is NOT to go from one finance agreement immediately into another. After your first car is bought and paid for you can happily save the instalments you would have paid towards it to fund the next car.

Then there is also the argument for using vehicle finance and investing the difference instead. Burning cash money on cars is after all never really very clever so not buying them at all, or as infrequently as possible is the real trick, not so much how you pay for them.

I mean if you are willing to put R6500 away every month towards a car and do it perpetually then you might as well just finance it from day one and get the nicest car from the word go and balls to the wall with residual since you were willing to spend that anyway.

Not to mention it will be new and motorplanned most likely having no additional outlay like the second hand cheapie cash options would.

Whether on finance or putting away for a cash purchase a sacrifice of R6500 is happening either way so you may as well extract the most value from it on a month to month basis.

Personally R6500 a month for a single vehicle is crazy town to me.

 

[johnjm]

The problem is two fold.

Cars are very expensive
The general population is afraid to have a car out of motor plan
The finance houses have smart ways to get payments low which forces the fool to perpetuate payments to either keep he car or replace it. Basically they are renting cars.

 

[Hamster]

There is no good debt. Debt that traps you to a job is not good debt.

I sometimes forget I'm on MyBroadband. Let me get my crayons out...

Lil' ol' Billy Bob over here smaaks buying a house. He cans nots affords it wiff cash so he goes to the bank and gets himselfs a loan. Billy and his wife, Lilly, stays in this house then for a couple of years, let us says five of them. He then, whilst still owing the bank quite a lot of paper sells it for a nice little profit. Billy mades himself some money with debt this way and improved his lifestlyle quite a bit.

Now Billy has a brother who is like ten times smarter and more successfulls (because he has a matric sertifikaat). Peter, the brother, buys a second property also on a loan and rents this one out to a lovely lady wiff her cats you see. Peter uses all the rental money to pays back the bank most of his bond cost and does some fency tax stuff with the help of his accountant buddy in Kokstad Correctional Facility (long story for 'n ander dag) to gets some re baits from the the tax people. So he is sort offs generating income from this loan. Smart hey?

Not as smart as their uncle who did the same kinda thing but used it to start a business. Now he has these people working for him picking up and carrying all the heavy stuff whilst he is sitting on his gat all day.

He also started his working life in the 70's as a verkoopsman and needed a car he could not pay for wiff monies (because he needed a job first, you see the catch 22 hey?) and then the bank kindly funded it so he could do his job.