Residual on finance

reactor_sa said:
If you can use the cash on hand to invest at a rate of return greater than the interest rate on the capital loan amount. Then it would make sense to maximise available cash on hand to invest by taking a residual.
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I have 5 different shares in my portfolio - each offers a return far greater than had a paid off an installment. I could have done worse and bought my car cash, which so many people think is the best way. Invest R300,000 cash into a car worth R200,000 in a year? When that R300,000 would have gone to R315,000+

That's almost 40% you've lost in the capital
 
Don't go the residual route. It's not recommended and will most likely cause you trouble later down the line. It's more of a false sense of security than anything else. Yes, it will drop your monthly premiums a bit, but you'll be hit with a rather large final payment just when you think you're almost done paying off your vehicle.

Problem is that if you can't afford that balloon amount at the end, you're going to need to take out further financing in order to pay that off. It's a trap.

Article that was posted on IOL some time ago - Link
 
reactor_sa said:
If you can use the cash on hand to invest at a rate of return greater than the interest rate on the capital loan amount. Then it would make sense to maximise available cash on hand to invest by taking a residual.
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Those would be returns on a marginal (small) amount plus involve risk - seeing as you would be losing out on the tax-free return based on the interest rate applicable to the loan. And given todays economic climate, would you really want to gamble? And, besides, if you were that financially savvy, you wouldn't be wasting your money on a car anyway.....

EDIT: and the main point is that most people who use residual do it just so they can squeak in with repayments. The converse would be uber wealthy who do not really care...
 
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Splinter said:
if you were that financially savvy, you wouldn't be wasting your money on a car anyway.....
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I think you're the 'average' that were in my polls :/

EDIT : Would you buy a car cash ?
 
Dolby said:
There's one :



Do a quick poll among people you know.

I tried it a few years ago and I promise you the wealthier and more educated either said 'yes' or 'depends'. The more 'average' were dead against it. I'm not a finance person myself and get the information from others - but really do that poll. Go to your CEO, CFO etc and then go to some of the younger PAs and see how they differ in their replies.

I'm trying to find some link on it now, but so far check this :

http://www.dailyfinance.com/2013/02...y-from-middle-class/#!fullscreen&slide=977574

1. The middle class focuses on saving. The wealthy focus on earning.
"We're taught to save, but we end up without enough money," says Siebold. "The average income per person in 2012 was $38,000. If you save 10 percent, you'll have $3,800 at the end of the year. That's not a model for wealth-building, and you'll never get rich that way."

Siebold says that rich people save money, too, but first they focus on boosting their earnings so that the percentage they save will be more meaningful.
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As for your poll, I have to call BS. I have a number of CA colleagues at work, and none would recommend this route.

The "Wealthy" can earn a lot because they have no debt - or if they do, they can leverage it. Doubt they do via residual finance on cars.

As for Siebolds example, he ignores growth or interest. For the average person, who is not wealthy or an entrepreneur, compound interest is the most infallible way to grow wealth.
 
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Dolby said:
I think you're the 'average' that were in my polls :/

EDIT : Would you buy a car cash ?
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Interesting question. I would.

Waiting for my car at Audi (after a service), I loooked at new cars in the floor amongst which was a very pretty R8. A salesman walked over and we start talking about the car. I mentioned that the monthly repayments must be high to which he replied "I have never worked it out. All the R8s sold here were cash deals".
 
Dolby said:
I have 5 different shares in my portfolio - each offers a return far greater than had a paid off an installment. I could have done worse and bought my car cash, which so many people think is the best way. Invest R300,000 cash into a car worth R200,000 in a year? When that R300,000 would have gone to R315,000+

That's almost 40% you've lost in the capital
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You're shifting goalposts - we were talking about residual finance being a very bad option to purchase a car; you are now talking about why buy a car at all.

As for your shares example - absolutely. Although those shares could drop in value at any time. But, that's a different discussion.
 
Enigma_ said:
Don't go the residual route. It's not recommended and will most likely cause you trouble later down the line. It's more of a false sense of security than anything else. Yes, it will drop your monthly premiums a bit, but you'll be hit with a rather large final payment just when you think you're almost done paying off your vehicle.

Problem is that if you can't afford that balloon amount at the end, you're going to need to take out further financing in order to pay that off. It's a trap.

Article that was posted on IOL some time ago - Link
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Absolutely - and all these residual plans require a significant deposit up front as well. So, you pay your cash deposit, rent your car for a while, and when it comes to the balloon payment you cannot afford it and have to let it go. So, in other words, you paid a deposit to rent a car....
 
Splinter - you've taken a residual, right?
I mean, this experience you have is actual experience?

I've done a few ; no deposit - and no, I didn't lose millions and the world didn't end either :/
 
Dolby said:
Splinter - you've taken a residual, right?
I mean, this experience you have is actual experience?

I've done a few ; no deposit - and no, I didn't lose millions and the world didn't end either :/
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So from shifting goalposts you are now going the asinine route. Oh well. To answer with the obvious - obviously not. But the numbers are easy to work out....

And I'm sure you didn't lose millions - but you lost out. What car do you currently have?
 
If I read correctly, the majority of posts here advise against residual based financing.

Is there ANYONE who would advise for residual based financing?
 
Take the residual and don't listen to MyBB. If you did your costs and calculations and it looks ok, go for it. Makes sure you know what you going into. Usually residual is straight forward.

Past 6 years sister's been residual buying. She's owned 3 cars. Nothing wrong or wary.
 
midnightcaller said:
Is there ANYONE who would advise for residual based financing?
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Every case is different.

As opposed to an outright 'no', it's closer to a 'depends'. Maybe for OP it won't work - but to answer without actually having any facts is silly. I took a residual on my first car I bought and after reading these, I thought it was the end of the world.

I 'lost' R20,000 over a period of 3.5 years - negligible really, as I drove the car I wanted back then and had far more cash flow to live more comfortably. Had I been more responsible and actually invested, my residual would have yielded more than what I 'lost'.

But I don't regret my choice
 
Residual does make sense as Dolby pointed out if you can invest the extra money at a higher interest rate than what you are paying on borrowing the money. Straightforward.

For the average Joe, and in this particular case, a residual is a no no. You'll end up spending that money and when the residual bomb drops you won't be able to pay it off.
Also someone that is in a financial pickle is not likely to have the required capital to garner big returns.
 
Chrome said:
Take the residual and don't listen to MyBB. If you did your costs and calculations and it looks ok, go for it. Makes sure you know what you going into. Usually residual is straight forward.

Past 6 years sister's been residual buying. She's owned 3 cars. Nothing wrong or wary.
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No, she hasn't owned anything. She's rented, and paid a high price for it. Which, once again, the OP is not needing in terms of current financial circumstances.

Why do I get the feeling that the only people who are defending residual financing are those that did it themselves? Or truly do not understand how money/interest works?
 
Splinter said:
So from shifting goalposts you are now going the asinine route. Oh well. To answer with the obvious - obviously not. But the numbers are easy to work out....

And I'm sure you didn't lose millions - but you lost out. What car do you currently have?
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The brainwashed consumer in me would love to know this bit of info which is actually quite meaningless :)
 
So wait - let me get this straight ...

I've done it over the past 6 years with no issues - nothing wrong or wary
Chromes sister has also done it over the past 6 years - nothing wrong or wart.
Splinter has never done it, ever - and strongly advises not even look at it.

Why do I get the feeling that he does not truly under how money/interest works?
 
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