Buying with a residual for the interest rate

[nexxus]

I've just been poking around at replacing my car and the crazy financing packs that are being offered is a bit confusing. I've avoid residuals in my payment place at almost all cost but I've just been wondering.

Audi (just a forinstance, sadly my next car is not very likely to be one) has an new A4 for R4999 (with a 63% Future Buy Back over 24 months), with a purported interest rate of 0% For me, that's just nonsense. Of course it isn't 0%

They have other deals at 6.31% and 6.72% with a ±45% balloon. The question I have, is that the real rate they're charging or is it some kind of effective interest rate which hides the true rate. If it's the real rate, then it's worth just taking the deal and knocking off the residual by building it into your monthly payment.

Is that right, or is there the inevitable catch?

 

[krycor]

I've always thought residual works out if u have the cash on hand and tie in an investment till you sell the vehicle?

 

[DMZ]

If you have the cash on hand and invest it at a higher rate than the loan cost, it would work out.. need the discipline though..

In general residuals have two results; the new car merry-go-round, where you are forever paying your monthly car payments but never actually own a vehicle, or refinancing and taking 10 years to pay-off your vehicle.

Balloon financing was invented to enable short term gratification at long term cost.

 

[Cray]

If you have the cash on hand and invest it at a higher rate than the loan cost, it would work out.. need the discipline though..

In general residuals have two results; the new car merry-go-round, where you are forever paying your monthly car payments but never actually own a vehicle, or refinancing and taking 10 years to pay-off your vehicle.

Balloon financing was invented to enable short term gratification at long term cost.

This, a number of people I used to work with are resigned to paying off that same amount for the rest of their lives while getting a new car every 5 years. Makes me shudder at the thought...

 

[Beachless]

I've just been poking around at replacing my car and the crazy financing packs that are being offered is a bit confusing. I've avoid residuals in my payment place at almost all cost but I've just been wondering.

Audi (just a forinstance, sadly my next car is not very likely to be one) has an new A4 for R4999 (with a 63% Future Buy Back over 24 months), with a purported interest rate of 0% For me, that's just nonsense. Of course it isn't 0%

They have other deals at 6.31% and 6.72% with a ±45% balloon. The question I have, is that the real rate they're charging or is it some kind of effective interest rate which hides the true rate. If it's the real rate, then it's worth just taking the deal and knocking off the residual by building it into your monthly payment.

Is that right, or is there the inevitable catch?

Sounds more like a lease.

 

[DMZ]

This, a number of people I used to work with are resigned to paying off that same amount for the rest of their lives while getting a new car every 5 years. Makes me shudder at the thought...

I have contemplated it, you are essentially leasing the vehicle, not the best financial decision but some are willing to pay the price to regularly drive a new vehicle that is beyond their means :wtf:

 

[DMZ]

Sounds more like a lease.

Exactly, and check what Avis will charge you for an A4 on a long rental!! You could make money buying the A4's and renting them!

 

[Carnajo]

If you have the cash on hand and invest it at a higher rate than the loan cost, it would work out.. need the discipline though..

In general residuals have two results; the new car merry-go-round, where you are forever paying your monthly car payments but never actually own a vehicle, or refinancing and taking 10 years to pay-off your vehicle.

Balloon financing was invented to enable short term gratification at long term cost.

This is correct, if, hypothetically, you had an investment you could make which earned you a greater income than what you're paying interest on the car (after tax, and taking risk into account) then it makes more sense to buy a car on residual and take the extra monthly amounts and pump them into that investment. Same goes if you have another loan at a higher rate, e.g. if the car is 6% if you take it with a residual and your homeloan is 7% then it makes more sense to pump that money into your home loan and then access it when it it time to repay the residual on the car thereby saving you 1% in interest.

As I mentioned though, you must know the risk of the investment, you might take that money and put into shares for a better return but you run the risk of downswings in the equity market potentially right at the end when the residual payment is due.

 

[Dolby]

where you are forever paying your monthly car payments but never actually own a vehicle

How is this unique to residuals?
My understanding is that any finance means you don't own it?

A quick chat around the office and everyone is paying off the vehicle and doesn't own it. Variation of finance options between everyone and yet no ones the cars?

 

[HapticSimian]

How is this unique to residuals?
My understanding is that any finance means you don't own it?

A quick chat around the office and everyone is paying off the vehicle and doesn't own it. Variation of finance options between everyone and yet no ones the cars?

The difference is that with a residual - or more often a balloon payment, when dealing with individual finance - you still don't own the car even at the end of your finance term. That residual amount becomes payable in full after the term; whilst it lowers installments it also logically means that you're paying less towards the capital amount than you would otherwise.

It moves the point of crossover between trade-in value and settlement amount back, sometimes to beyond the term of finance if you buy something that doesn't retain value well or you do high mileage.