Vehicle Finance

[MikyMouse]

Hi all,

I am about to purchase a new vehicle (well I've ordered it and will sort out the financing on Monday) and have a question about repayments.

My total vehicle cost was R198K with a R75K deposit which leaves me with a loan of R123K.

At the moment I was planning on paying this off over 48 months @ a fixed interest rate of 13% = R3360pm (incl mothly admin fee). At the same time however I am budgeting a monthly contribution of R2k to an RA.

The question is do I stick with this split of loan repayments and investment, or do I pause my investments entirely in order to pay off my car sooner? If I were to pay my loan off with a monthly contribution of R5360 @ 13% = 27 months.

If I calculate the amount that I'd save by doing this it equals approx R16 560
(R3360 x 48 = R161 280 vs R5360 x 27 = R144 720)

The one way that I tried thinking about it was to compare the two interest rates 13% on the loan and ??% on the investment and that's where the problem comes in. In a great year I could earn 15% - 17% from the RA but that isn't guaranteed, but what is guaranteed is the fixed loan repayment %

Any advice and comments are much appreciated!

 

[SauRoNZA]

You would further need to offset the depreciation of the car and add that on top of the interest if you are going to get technical.

Also the car doesn't benefit from compound interest by the time you retire and doesn't give you a tax rebate.

If you aren't hitting the 15% RA ceiling (and soon 27.5% one) then don't stop paying that.

I would say as long as the car is less than 15% of your gross income monthly then it's more than affordable for you and I would say pay it off as required and still do the RA.

Doing a 48 month term with a large deposit is already very good. The 13% is a bit crazy, are you guessing that figure?

Anyway you might even do a 54 month and see if you get a better rate and then pay it as if it was 48 months.

Drop spare change in there when you have it.

More than likely the car will be a vessel for you to make more money and therefore add more to your RA...not lees.

The car is a luxury item, your Retirement is not. Add as much to it as early (young) as you can.

 

[MikyMouse]

Hey SauRoNZA thanks for the reply.

I'm not hitting the 15% tax cap. The 13% is a figure I got from a dealer a month ago. Was 11.25% variable and 12.75% fixed. The paperwork for my vehicle finance will be going through on Monday so I'll be looking at all my options incl 60months and like you say pay it off sooner.

I'd definitely add whatever extra I can into my car. The question is to top up the RA to 15% first (with bonuses) or to put it all into the car

 

[supersunbird]

Hey SauRoNZA thanks for the reply.

I'm not hitting the 15% tax cap.The 13% is a figure I got from a dealer a month ago. [/B]Was 11.25% variable and 12.75% fixed. The paperwork for my vehicle finance will be going through on Monday so I'll be looking at all my options incl 60months and like you say pay it off sooner.

I'd definitely add whatever extra I can into my car. The question is to top up the RA to 15% first (with bonuses) or to put it all into the car

The tax benefit cap is already 27.5% off all income, since 1 March 2016, not 15% anymore.

Anyway, by the time you retire the car will be a way distant memory, you'll have trouble remembering its number plate and such, while all the RA investments will be putting food in your mouth.

So if I was you, I'd just keep saving in the RA, and pay the car off as planned. Put anything extra you get along the way into the car if you can.

 

[MikyMouse]

The tax benefit cap is already 27.5% off all income, since 1 March 2016, not 15% anymore.

Anyway, by the time you retire the car will be a way distant memory, you'll have trouble remembering its number plate and such, while all the RA investments will be putting food in your mouth.

So if I was you, I'd just keep saving in the RA, and pay the car off as planned. Put anything extra you get along the way into the car if you can.

The question then is do I pay the car off over 60months and put more into an RA or 48months and less into an RA?

I know they say that you can never make up time in terms of savings at a later stage...

The difference in monthly repayments with 48 vs 60 months is R500 btw

 

[borga]

You would further need to offset the depreciation of the car and add that on top of the interest if you are going to get technical.

No you don't. You are evaluating which is the better option paying the car off earlier or continuing investing.

Whatever option you choose your car will depreciation and your will incurred the depreciation cost, so it is not a relevant cost to your decision making. As the cost will incurred whatever your choose.

As to the reply on OP. Remember the saved interest is considered an after tax return as you would not pay any tax on interest savings. As such you should compare it to the after tax return on your investment. In this case your RA would also not be taxed (at least not until you retire) so that is also an after tax return.

So it comes down to the following.
1. Do you believe that your RA return will be above 13% for the year?
2. How disciplined saver are you?

1. As to one, while the future is uncertain based on a lot of articles I read there were many warnings that we should not expect the next few year to be like the last few years where we saw 20%+ per year.

Equities long term average seems to be around 6.5-7% real return, so 20%+ nominal ,around 14% real (excluding inflation) is above that so for the average to remain relevant we shouldn't be surprise if we saw a few year of bad returns such as last year.

As such taking taking a bet that your RA will return 13% may or may not be a good idea.

Also once money is in the RA it is stuck there, so if you expect the RA to be 20% this year and only 1% for the following years you can't take the money out of the RA and use the original payment and the return above interest to reduce your loan.

2. This is a very important things as even in a bad market where you "Knew" your RA would not beat the inflation it does not help if you pay your car loan off early but not invest the rest of the period into the RA to make up for lost time. And many people seems to be bad with this. So it might be a good idea to keep the car loan and invest in the RA.

3. These options need not be mutually exclusive if your car bond is an access bond. Say you overpay your car loan by X amount and then tomorrow we have a crash and stocks drop 20-30%. If you think the market is at the bottom you could then take the extra in your access loan and buy into your RA at a lower price. This increase the probability that would would be part of market to gain from any recovery.

I know they say that you can never make up time in terms of savings at a later stage...

But the time you were not saving wasn't lost, you were making up the saving in reduced interest cost which also adds to your wealth.

Overall OP unless you are very discipline and willing to take a risk on return while having a fixed cost choose not paying early.

Another way of looking at it could be the following, Would you borrow money at 13% to invest in your RA? If not repay the debt first.

 

[MikyMouse]

No you don't. You are evaluating which is the better option paying the car off earlier or continuing investing.

Whatever option you choose your car will depreciation and your will incurred the depreciation cost, so it is not a relevant cost to your decision making. As the cost will incurred whatever your choose.

As to the reply on OP. Remember the saved interest is considered an after tax return as you would not pay any tax on interest savings. As such you should compare it to the after tax return on your investment. In this case your RA would also not be taxed (at least not until you retire) so that is also an after tax return.

So it comes down to the following.
1. Do you believe that your RA return will be above 13% for the year?
2. How disciplined saver are you?

1. As to one, while the future is uncertain based on a lot of articles I read there were many warnings that we should not expect the next few year to be like the last few years where we saw 20%+ per year.

The JSE long term average is around 6.5-7% real return, so 20%+ nominal ,around 14% real (excluding inflation) is above that so for the average to remain relevant we shouldn't be surprise if we saw a few year of bad returns such as last year.

As such taking taking a bet that your RA will return 13% may or may not be a good idea.

Also once money is in the RA it is stuck there, so if you expect the RA to be 20% this year and only 1% for the following years you can't take the money out of the RA and use the original payment and the return above interest to reduce your loan.

2. This is a very important things as even in a bad market where you "Knew" your RA would not beat the inflation it does not help if you pay your car loan off early but not invest the rest of the period into the RA to make up for lost time. And many people seems to be bad with this. So it might be a good idea to keep the car loan and invest in the RA.

3. These options need not be mutually exclusive if your car bond is an access bond. Say you overpay your car loan by X amount and then tomorrow we have a crash and stocks drop 20-30%. If you think the market is at the bottom you could then take the extra in your access loan and buy into your RA at a lower price. This increase the probability that would would be part of market to gain from any recovery.



But the time you were not saving wasn't lost, you were making up the saving in reduced interest cost which also adds to your wealth.

Hi borga, thanks for the in depth reply.

As for your questions:

1) I guess this is the trickiest of them as you really don't know. At this point I'm not that positive. Also what I think I need to bear in mind is that if I do choose to pay off the car as quickly as possible this would be in 2years. So in terms of investing quite a short time period. So I'd say would my RA do better than 13% for the next 2 years. Obviously this will change when I get the actual interest rates on Monday.

2) In short Yes. I'm a very disciplined saver and value this above any other cost etc. That being said if I pause all RA payments for 2 years and then resume them with the amount that in paying into the car loan, would this ever compare to the compound interest gained if I were to pay the loan off and make RA contributions?

3) I'll have to find this out! Thanks for pointing it out for me.

 

[SauRoNZA]

No you don't. You are evaluating which is the better option paying the car off earlier or continuing investing.

Whatever option you choose your car will depreciation and your will incurred the depreciation cost, so it is not a relevant cost to your decision making. As the cost will incurred whatever your choose.

.

Very good point since you aren't choosing to buy or invest but rather to buy and invest.

Personally I'm always pension/RA first kind of guy, then medical aid, then the rest.

 

[borga]

Hi borga, thanks for the in depth reply.

From a personal perspective I had to choose in 2013 to sell existing investments and buy my car cash or to buy it on a loan. I bought on a loan (prime interest rate) and kept the investment.

I have kept a records of the impact on my wealth would have been on both options using actual return on my total investments and end of March buying the car on a loan resulted in a net gain equal of about 25% of the original loan amount.

2) In short Yes. I'm a very disciplined saver and value this above any other cost etc. That being said if I pause all RA payments for 2 years and then resume them with the amount that in paying into the car loan, would this ever compare to the compound interest gained if I were to pay the loan off and make RA contributions?

You are gaining even when you stopped contributing the the RA, this gain comes in the form of reduced interest cost, so your gain is equal to the rate of the interest saved.

 

[MikyMouse]

From a personal perspective I had to choose in 2013 to sell existing investments and buy my car cash or to buy it on a loan. I bought on a loan (prime interest rate) and kept the investment.

I have kept a records of the impact on my wealth would have been on both options using actual return on my total investments and end of March buying the car on a loan resulted in a net gain equal of about 25% of the original loan amount.

Wow interesting!

 

[supersunbird]

After 2008, for years they said returns will be weak over the next decade, I heard them saying it in 2009 and 2010 and 2011 and so on, in the meantime it shot up. So I wonder if its the same still.

 

[TheBadMadMan]

Why fix your interest rate though? Does that not guarantee that you will be paying more? I'd go for linked, reason being is if interest eventually increases to 13%, you would still be better off and would have made gains during the time in which interest was under 13% . Also, just pay in extra into the linked vehicle loan from the start, that way you offset any future increases as well.

 

[MikyMouse]

Why fix your interest rate though? Does that not guarantee that you will be paying more? I'd go for linked, reason being is if interest eventually increases to 13%, you would still be better off and would have made gains during the time in which interest was under 13% . Also, just pay in extra into the linked vehicle loan from the start, that way you offset any future increases as well.

Peace of mind, If the economy tanks or Zuma fires a few more people the interest rates could go down the tubes. At least this way I'm covered and know what I'm paying each month.

 

[Dr Who]

Hi All

A little bit of advice, I suggest that you pay into your RA as per normal and then get a prime linked interest rate on the vehicle. The reasons have been detailed above but ultimately if you can afford 3360 now then pay that from the start, I am almost certain that the overpayment today will compensate for any major interest rate moves tomorrow. If not well then both your investments and your car value have tanked as SA is down the tubes.

On a second point, I had a flat which I finished paying in November last year with the plan that I will redirect the funds to my primary residence. I am a good saver and if I have managed to re-direct 50% of those funds so far its been good. Funny how you just seem to spend more when you saving more.

 

[Jehosefat]

Also don't forget that the tax benefit on the RA is effectively extra income.

Assume your average tax rate is 25% then for every R1000 that you could invest in your RA (pre tax money), you will only be able to put R750 into your car (after tax money). So your savings on the car would have to be roughly 33% more than what you could earn on the RA for this to be a worthwhile approach. And this number gets higher as your average tax rate increases (it also looks much worse if you use your maximum marginal rate rather than the average).

 

[MikyMouse]

So my finance is getting closer to being finalised and it looks like both MFC and Wesbank are offering the exact same interest rate. Are there any preferences between these 2 companies?

 

[MikyMouse]

So my finance is getting closer to being finalised and it looks like both MFC and Wesbank are offering the exact same interest rate. Are there any preferences between these 2 companies?

Also how is it when I put the same numbers into both their online calculators I get different monthly repayments?

 

[borga]

Also how is it when I put the same numbers into both their online calculators I get different monthly repayments?

I assume you are refering to these calculators.
https://www.mfc.co.za/instalment-calculator
https://www.wesbank.co.za/wesbankcoza/calculate/repayment

MFC includes an initiation fee of R1000 (R1140 vat inclusive) automatically. Also a R57 monthly admin charge.
For the Wesbank one there is tick boxes to include initiation fee R1000 (R1140 vat inclusive) and the Monthly admin R57.

Ticking both option then your difference should be small, Wesbank seems to be the correct one if I use excel to recalculation so not sure what additional stuff MFC is taking into account.

The difference that the MFC amount is more than the Wesbank (and excel) amount and seems to increase with loan size. It also increase when interest rates decrease, so not sure what it is about.

 

[MikyMouse]

I assume you are refering to these calculators.
https://www.mfc.co.za/instalment-calculator
https://www.wesbank.co.za/wesbankcoza/calculate/repayment

MFC includes an initiation fee of R1000 (R1140 vat inclusive) automatically. Also a R57 monthly admin charge.
For the Wesbank one there is tick boxes to include initiation fee R1000 (R1140 vat inclusive) and the Monthly admin R57.

Ticking both option then your difference should be small, Wesbank seems to be the correct one if I use excel to recalculation so not sure what additional stuff MFC is taking into account.

The difference that the MFC amount is more than the Wesbank (and excel) amount and seems to increase with loan size. It also increase when interest rates decrease, so not sure what it is about.

Interesting. Thanks for the calcs though

 

[Speedster]

I’m looking at buying a new car - current one is 13 yr old which is just starting to give more trouble than it’s worth. I’m looking at buying brand new and the dealer is offering 0% fixed APR for 4 years if purchasing through HP. Just wondering if it’d be better to go this route or get car loan? Have never used HP when purchasing before.

What country are you in?