Finance Questions

[JJDT]

We are currently looking at sourcing a new car (new to our household that might include a used model) as our current car decided to call it a day (not economically viable to repair).

 

While we browsing and every now and then appears an ad of a new car with R0 deposit and X% interest with 30% balloon and 72month repayment.

 

I'm not keen on this whole balloon payment as it might lower your monthly payment but then you have that huge amount waiting in the dark at the end of the term. This might suite people who like to drive cars only for 3 years and then trading it for something else(also a potential pitfall as the car value might depreciate faster, leaving you with a shortfall).

 

Question: I assume that the balloon amount is deducted from the listed price, is this correct? Calculations points to this as being true by not using a balloon % to view the difference in amounts payable.

 

If the answer to above is indeed yes and I make my own calculations there is a difference in the amounts payable.

I used the Wesbank online calculator as the source of my calculation.

 

1. The listing price is R224 819; R0 deposit, 30% balloon, interest of 8% p.a. and payable over 72 months. The result is R3299. This calculated result is based on my assumption that the balloon amount is in fact subtracted from the list price before applying the finance calculation.

 

2, If I reference question 1 as a yes again and my assumption regarding that the balloon amount is subtracted from the list with my own calculation the amount differs by R450 per month payable. My calculation was to obtain a 30% value of R224 819 which totals to R67 446 and subtracting this amount from the list price is R157 374(rounded for ease of calculation). Using the R157 374 as a finance amount with R0 deposit, 8% interest p.a. and payable over 72 months the answer R2849.

I used the calculator again and increased the finance amount in order to find the amount that matches the balloon financed amount payment. With a R183 000 financed amount I was able to match the balloon payment amount. This is an extra R25 626,42.

 

Where does this extra amount come from as I still need to pay R67 446 at the end of the term?

 

The above amounts does not include all the dealers costs, just the amounts as per advertisement.

 

[fanievb]

have you included initiation fees (calculated on the loan amount) and service fees (R69 pm)?

initiation fee can be paid up front, but its usually deferred and credit providers charge interest on the deferred amount.

[Chris_]

I'm sure someone here works in a Volvo dealership and will perhaps know all the ins and outs. Hopefully they pop in

[The Ouzo]

As fanie said, you are perhaps leaving out the bank initiation and monthly fees.

 

But you basic assumption is correct, if the list price of the vehicle is R100k, and you take a 30% balloon, you will be paying off the R70k monthly with the 30k hanging over your head.

 

But be aware, balloon is based on the base price of the vehicle excluding any extras, so if your 100k car is a 80k car with 20k extras, the 30% balloon is 30% of 80k

 

edit to elaborate further.

 

Balloon is not always a bad thing if you are aware of what you're in for.

It allows you to buy a more expensive car and keep in your budget.

 

You are planning to keep the car for a long period, so you have a few options.

A) put some money aside every month so you can pay off the balloon at the end of the finance period

B) put the money from A into the loan and pay off the balloon slowly

C) at the end of the loan period finance the balloon portion.

 

Yes all of the above mean you will be paying more than the sticker price by the time you are finished, but not many people can save up and buy a car cash these days.

 

Just be very aware of the resale value of the car you are buying. If you get something with terrible resale and you decide after 3 years you want to get rid of it, you will be in a hole that is not easy to get out of.

Also make sure that any insurance you take out on the vehicle has cover for the full amount of the loan, including the balloon.

 

This calculator includes bank fees and allows you to play with different balloon amount etc.

https://partners.wesbank.co.za/partners/calculators/repayment.xhtml?siteID=volvo

Edited September 9, 2020 by ouzo

[River Rat]

You are still paying the interest on the 30% balloon payment just not the capital which is 8%/12 x 224819 x 30% = R449.63. The only way the balloon payment works is if you have a guaranteed buyback  otherwise avoid it like the plaque.

[The Ouzo]

You are still paying the interest on the 30% balloon payment just not the capital which is 8%/12 x 224819 x 30% = R449.63. The only way the balloon payment works is if you have a guaranteed buyback  otherwise avoid it like the plaque.

I would ad that you want to avoid guaranteed buybacks too. The customers that arrive here with German cars with GFV all have the same story. The brand they have bought has gone out of their way to find faults with the car they want to give back and have deducted insane amounts from the GFV they are supposed to be getting.

[JJDT]

Thanks for the replies.

 

@River Rat thanks for your explanation regarding the extra amount.

I do know the consequences of the balloon amount hence I just did a little more "digging" with my calculations.

Previously most manufacturers made a statement of a guaranteed buyback and their ads but it has been a long time since I saw that statement.

[Escapee..]

I would ad that you want to avoid guaranteed buybacks too. The customers that arrive here with German cars with GFV all have the same story. The brand they have bought has gone out of their way to find faults with the car they want to give back and have deducted insane amounts from the GFV they are supposed to be getting.

 

I have a couple of friends who have gone for the GFV option through Ford and Mercedes.

 

No issues at all, they had a bit of wear and tear and was definitely not in showroom condition when they returned them

[The Ouzo]

I have a couple of friends who have gone for the GFV option through Ford and Mercedes.

 

No issues at all, they had a bit of wear and tear and was definitely not in showroom condition when they returned them

If you do 20 000km per year for 3 years there will be fair wear and tear, the initial GFV value given to you when you take out the contract supposedly takes this into account, hence the mileage and time limit on the cars.

The issue comes in when you are penalised even further for that fair wear and tear.

[Slowbee]

Yes all of the above mean you will be paying more than the sticker price by the time you are finished, but not many people can save up and buy a car cash these days.

A more general comment. I always find this an odd comment.

 

I can afford R300 a month to buy a TV or R700 to buy a new fancy car, but I dont have the cash.

 

Well suck it up for a year, save the R300 or R700 and then you will have some cash.

 

It is such a weird thing that folk have money for debt, but no money to save.

[Jehosefat]

A more general comment. I always find this an odd comment.

 

I can afford R300 a month to buy a TV or R700 to buy a new fancy car, but I dont have the cash.

 

Well suck it up for a year, save the R300 or R700 and then you will have some cash.

 

It is such a weird thing that folk have money for debt, but no money to save.

 

If you need a car you need a car. Can't always make do without one for a year or 5 while you save up. Also by the time you've saved up for it, the price may be a lot higher.

 

Don't get me wrong, for things like cars I'm completely on your page that buying it cash rather than debt is a better option. The fact is that it's not often an option though.

Edited September 9, 2020 by Jehosefat

[The Ouzo]

A more general comment. I always find this an odd comment.

 

I can afford R300 a month to buy a TV or R700 to buy a new fancy car, but I dont have the cash.

 

Well suck it up for a year, save the R300 or R700 and then you will have some cash.

 

It is such a weird thing that folk have money for debt, but no money to save.

yes and no.

 

Yes because you dont HAVE to have a fancy car when a basic one will do the job just fine.

No because something like a car is often NEEDED to get to work and earn that money.

 

Then there is also the smart way of playing with money. To this I dont profess to be an expert at all.

But i've been told that in some cases its better to pay the monthly installment than to pay the cash, even if you have the cash. Its not about the end price of the vehicle but rather to do with money on hand/cash flow. 

Edited September 9, 2020 by ouzo

[Stevief]

yes and no.

 

Yes because you dont HAVE to have a fancy car when a basic one will do the job just fine.

No because something like a car is often NEEDED to get to work and earn that money.

 

Then there is also the smart way of playing with money. To this I dont profess to be an expert at all.

But i've been told that in some cases its better to pay the monthly installment than to pay the cash, even if you have the cash. Its not about the end price of the vehicle but rather to do with money on hand/cash flow.

100% correct

Some people should not get into any long term lease debt trap .

Some people should finance a portion of said asset if it suits long term goals.

Some folks can drop cash or take on full debt depending on Their circumstance and work it to their advantage.

 

Everyone is different so no right or wrong answer . Every individual will require a plan that works for them. Not for you or for the bank or the dealer for THEM!

[LazyTrailRider]

Ah, vehicle financing. The one thing I've built more spreadsheets for than any sane person would think reasonable...

 

What Stevie has said is pretty much the only "correct" answer here. Without getting into a super long post:

• GFV deals aren't all bad. To figure out if they are, you need a bit of a crystal ball to figure out whether the future value is indeed what the vehicle will be worth at that point, but some researched guesswork can help. Usually, with high-volume models, the financing houses sell so many of them this way that the market value is actually determined by the number of units "given back" by people at the end of their terms. Don't buy a car using a GFV deal if 1) you have kids who will scratch, dent and otherwise wear finishes 2) you're not super pedantic about keeping everything 100% anyway 3) you do a lot of mileage (the penalties on mileage are usually astronomical).
• New cars (and often new cars offered through GFV deals) are usually offered at very low interest rates. This can make a big difference to your overall cost, but in most cases this is more than offset by the depreciation premium you pay for a new car vs a demo model or one that's a year old with 20,000km on it. Do this calculation and compare side-by-side.
• Choosing to finance or buy cash is totally down to the unique situation you find yourself in. As someone else has pointed out, buying cash isn't necessarily always the best option. Firstly, you may have the ability (through access to some investment vehicle, pardon the pun) to earn a higher return than the financing rate, so it makes sense to park the cash in the investment and finance the car. Secondly, you may simply have something better to do with the cash in a more generic sense; maybe you get short-term business opportunities from time to time which need a few hundred thousand ZARs to capitalise on. The important point is that cash used to buy a car has to come from somewhere where it's doing something (usually earning a return of some kind), it's never just in your wallet doing nothing.

Real-life example: I bought a low-mileage demo 18 months ago for R500k. I could have paid cash, but I paid half cash and financed the other half. Why? Because I like having cash around to invest in things which come across my path, so the other half stayed in the bond on my primary residence. The car's financing is at prime +1 (which is quite expensive, I've previously financed a 2 year old BMW at prime). The difference between the interest paid on the vehicle financing and the bond rate was about R10k over the term of the financing, which I simply regarded as the cost of having R250k available at a whim.

 

A few months ago, I started looking at another investment property. At first, I was thinking of using the R250k towards the deposit, but if you're renting out a property you actually want to bond as much of it as possible instead of paying cash. Why? Because you're leveraged - the tenants are paying a large portion of your interest, and the interest is tax deductible. This means I didn't need the deposit, but better monthly cashflow (ie no car financing payment) would make getting the bond much easier, so I paid off the car and redirected a monthly amount equal to what the the repayment was to my primary bond. My cashflow looks better, plus I'm saving a portion of the R10k interest cost and effectively investing it into the new property.

 

Sorry, this is getting verbose, but the point I'm trying to make is that every single scenario is different. Let me however throw some points in to end off with:

• If you're going to buy a brand new car, try to do so through a low interest rate financing deal. In this case, don't worry about putting down a deposit, but try to avoid the balloon payment.
• If you're going to buy a brand new car and you only want to keep it for 3 years, by all means go for a GFV deal, but know that you're paying a premium for it. No shame in that, I've done it once or twice with full awareness of my petrolhead addiction. If you're not a car enthusiast, don't do this.
• If you want the best overall financial outcome, buy a 2 year old low mileage car with a maintenance plan which can still be extended (VW for example have good options here), put down as large a deposit as you're comfortable with, finance the rest without any balloon and keep it for 7 or more years.

[Captain Fastbastard Mayhem]

<p>

 

Ah, vehicle financing. The one thing I've built more spreadsheets for than any sane person would think reasonable...

 

What Stevie has said is pretty much the only "correct" answer here. Without getting into a super long post:

• GFV deals aren't all bad. To figure out if they are, you need a bit of a crystal ball to figure out whether the future value is indeed what the vehicle will be worth at that point, but some researched guesswork can help. Usually, with high-volume models, the financing houses sell so many of them this way that the market value is actually determined by the number of units "given back" by people at the end of their terms. Don't buy a car using a GFV deal if 1) you have kids who will scratch, dent and otherwise wear finishes 2) you're not super pedantic about keeping everything 100% anyway 3) you do a lot of mileage (the penalties on mileage are usually astronomical).
• New cars (and often new cars offered through GFV deals) are usually offered at very low interest rates. This can make a big difference to your overall cost, but in most cases this is more than offset by the depreciation premium you pay for a new car vs a demo model or one that's a year old with 20,000km on it. Do this calculation and compare side-by-side.
• Choosing to finance or buy cash is totally down to the unique situation you find yourself in. As someone else has pointed out, buying cash isn't necessarily always the best option. Firstly, you may have the ability (through access to some investment vehicle, pardon the pun) to earn a higher return than the financing rate, so it makes sense to park the cash in the investment and finance the car. Secondly, you may simply have something better to do with the cash in a more generic sense; maybe you get short-term business opportunities from time to time which need a few hundred thousand ZARs to capitalise on. The important point is that cash used to buy a car has to come from somewhere where it's doing something (usually earning a return of some kind), it's never just in your wallet doing nothing.

Real-life example: I bought a low-mileage demo 18 months ago for R500k. I could have paid cash, but I paid half cash and financed the other half. Why? Because I like having cash around to invest in things which come across my path, so the other half stayed in the bond on my primary residence. The car's financing is at prime +1 (which is quite expensive, I've previously financed a 2 year old BMW at prime). The difference between the interest paid on the vehicle financing and the bond rate was about R10k over the term of the financing, which I simply regarded as the cost of having R250k available at a whim.

 

A few months ago, I started looking at another investment property. At first, I was thinking of using the R250k towards the deposit, but if you're renting out a property you actually want to bond as much of it as possible instead of paying cash. Why? Because you're leveraged - the tenants are paying a large portion of your interest, and the interest is tax deductible. This means I didn't need the deposit, but better monthly cashflow (ie no car financing payment) would make getting the bond much easier, so I paid off the car and redirected a monthly amount equal to what the the repayment was to my primary bond. My cashflow looks better, plus I'm saving a portion of the R10k interest cost and effectively investing it into the new property.

 

Sorry, this is getting verbose, but the point I'm trying to make is that every single scenario is different. Let me however throw some points in to end off with:

• If you're going to buy a brand new car, try to do so through a low interest rate financing deal. In this case, don't worry about putting down a deposit, but try to avoid the balloon payment.
• If you're going to buy a brand new car and you only want to keep it for 3 years, by all means go for a GFV deal, but know that you're paying a premium for it. No shame in that, I've done it once or twice with full awareness of my petrolhead addiction. If you're not a car enthusiast, don't do this.
• If you want the best overall financial outcome, buy a 2 year old low mileage car with a maintenance plan which can still be extended (VW for example have good options here), put down as large a deposit as you're comfortable with, finance the rest without any balloon and keep it for 7 or more years.

This.

[Duane_Bosch]

I can only speak from my own personal experience on this.

 

Most people take these balloon payment options to buy cars they can't ACTUALLY afford so they can pronk for their mates who are making the same *** decision. The problem with this is that they aren't buying Toyota carolla's where the depreciation will be manageable. They're buying high end cars where the depreciation will be huge. My vote is a strong NO on this.

 

I bought a car with a 30% balloon payment. It was by far the worst financial decision I've ever made. Firstly you are paying interest on the full amount so the monthly saving is tiny. In my case the depreciation out performed the value of the vehicle so when it came time to trade or pay the balloon the trade on the vehicle was less than I owed basically forcing me to re finance the car. Then they REALLY screw you with the interest rate.

 

And let's not forget. You're essentially paying off a piece of the car twice. DON'T DO IT! 

 

Rather take the car you want and buy the lower spec version of that car.

 

So instead of buying the BMW 320 with the M Sport Pack buy the 318 base. It will still be a great car.

Edited September 10, 2020 by Duane_Bosch