Finance Questions

[The Ouzo]

 

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.

 

Good post

 

I'd like to just add. The banks will give you a better interest rate the higher the amount you are financing, so if you have a big deposit, dont put it down straight away, finance the full amount, let the first installment go off, and then put the deposit into the account and ask the bank to recapitalize.

This way you get the benefit of the low interest rate and the deposit.

[LazyTrailRider]

Balloons aren't always bad. But... they should only be used in scenarios like the one I've described where you have the cash, or have plenty of leeway and would be able to afford the monthly payment on the full amount comfortably.

 

I bought a new BMW 1 series at a stage with a 50% balloon with buyback after 48 months. This was effectively a lease. I had zero additional costs except fuel, but my itch struck and I wanted a bigger one after 30 months or so with 30,000km racked up. At that point, the depreciation and the financing were roughly equal, so I traded it in on an X3 with 80,000km still under plan, whacked down the cashed I'd saved purposefully because my monthly repayment was so low as a deposit, and financed it over 48 months. After another 2 years I sold it for R30k more than I owed. Ironically, a BMW SUV has been my most financially sound car arrangement since the 1971 Merc I had as a student!

 

The point is, if you can afford the full amount anyway, a carefully structured balloon scheme can work in your favour.

 

For example, have a look at the deals BMW recently offered, the structure below is a prime example of a super-low interest rate (0.65% !) on a vehicle which has already taken its new-car depreciation knock, with a high balloon GFV. If I was buying an X3 right now, this would be a no-brainer...

 

(Except for the fact that this one unbelievably does NOT have LEDs, WTF? Duane, your comment that base models are as nice as fully specced ones is not true. A fully optioned model these days usually feels nicer than a base model of the series above it).

 

Edited September 10, 2020 by LazyTrailRider

[LazyTrailRider]

Good post

 

I'd like to just add. The banks will give you a better interest rate the higher the amount you are financing, so if you have a big deposit, dont put it down straight away, finance the full amount, let the first installment go off, and then put the deposit into the account and ask the bank to recapitalize.

This way you get the benefit of the low interest rate and the deposit.

 

Correct, I should have added that.

 

Also, there are early cancellation fees on contracts larger than R250k, although for some reason there seems to be inconsistency with how finance houses enforce this...

Edited September 10, 2020 by LazyTrailRider

[Duane_Bosch]

 

The point is, if you can afford the full amount anyway, a carefully structured balloon scheme can work in your favour.

 

Everything you say is true. But you are clearly speaking from a position of financial strength. And that's great. However most people who take balloon payments don't do so from a position of financial strength. They do so from a position of weakness and doing so will only make them weaker.

 

Which speaks to my point of rather buying a lower spec vehicle that one CAN afford instead of taking a balloon payment. I didn't say base models are as nice as fully specced models. My point spoke to affordability.

 

I'll admit that I'm financially very conservative so take it from whence it comes. For example. I looked at that BMW flier you posted. IMO you'd have to be the dumbest person alive to go for that deal. You're dropping 300k up front and paying R5200 a month to pay off 185k. And at the end of the term you could potentially come out with a 5 year old X3 that you owe R285k on. That you then have to refinance because some doowes bumped into you at a traffic light and now the GFV is moer toe.

 

But as I said I'm very conservative when it comes to these things. I'll never finance a toy and I'll never take an RV on a car ever again. And I drive a bottom of the range Ford Plaasbakkie.

Edited September 10, 2020 by Duane_Bosch

[LazyTrailRider]

Everything you say is true. But you are clearly speaking from a position of financial strength. And that's great. However most people who take balloon payments don't do so from a position of financial strength. They do so from a position of weakness and doing so will only make them weaker.

 

Which speaks to my point of rather buying a lower spec vehicle that one CAN afford instead of taking a balloon payment. I didn't say base models are as nice as fully specced models. My point spoke to affordability.

 

I'll admit that I'm financially very conservative so take it from whence it comes.

 

My comments were from a "comparing apples with apples" point of view when considering the many structuring options available for a specific car which costs X.

 

Whether X is a sensible purchase to start off with is the aspect you've covered. At all times, don't buy something more expensive because a balloon payment makes it possible.

 

So yes, I agree with you.

[stefmeister]

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.

 

+100,

I would say if you have to finance a car with anything more than 54 months and balloon payments you're just living above your means. 

Even if you think you can manage your finances with a balloon payment, always remember, life has a strange way of throwing curve balls at you. A balloon is borrowing money twice from future you.

The need and want quickly wanes after the first couple of installments, and buyers remorse will be even worse 5 - 6 years down the line when you have to dish out a huge chunk of cash on a rather old and tired looking car with low resale value, that's out of its warranty, probably has a few dings and scratches, worst case had a fender bender or two, has well over a 100k km, and is becoming a huge liability in terms of reliability (and no, those motorite extended warranties won't cover you for much, if at all).

[Duane_Bosch]

(and no, those motorite extended warranties won't cover you for much, if at all).

Don't even get me started on those things.

 

Yes sir. Your claim has been accepted. But for moving parts the claim is limited to 50% of the price of the repair. Oh and we don't cover any electrical, audio or aircons. So basically your warranty is for the plastics and the upholstery. 

 

WHAT PART OF A CAR THAT BREAKS IS NOT A MOVING PART???

[The Ouzo]

+100,

I would say if you have to finance a car with anything more than 54 months and balloon payments you're just living above your means. 

Even if you think you can manage your finances with a balloon payment, always remember, life has a strange way of throwing curve balls at you. A balloon is borrowing money twice from future you.

The need and want quickly wanes after the first couple of installments, and buyers remorse will be even worse 5 - 6 years down the line when you have to dish out a huge chunk of cash on a rather old and tired looking car with low resale value, that's out of its warranty, probably has a few dings and scratches, worst case had a fender bender or two, has well over a 100k km, and is becoming a huge liability in terms of reliability (and no, those motorite extended warranties won't cover you for much, if at all).

Again, its down to personal circumstances. 

I have a number of high earning customers that rather finance over 72 months for a cash flow perspective.

[LazyTrailRider]

For example. I looked at that BMW flier you posted. IMO you'd have to be the dumbest person alive to go for that deal. You're dropping 300k up front and paying R5200 a month to pay off 185k. And at the end of the term you could potentially come out with a 5 year old X3 that you owe R285k on. That you then have to refinance because some doowes bumped into you at a traffic light and now the GFV is moer toe.

 

Hmmm. I'd like to take you on about this because my overall point is still that I'm not talking about what to buy, I'm talking about how to buy it.

 

You're incorrect in stating that it would be stupid to go for this deal. I'm 99% sure that what you're intending to say is that it would be stupid to buy a R763k X3.

 

The difference is subtle but extremely important. If person Y has decided that they want an X3 and a R763k price fits comfortably into their budget, this is literally the best possible way for them to drive one. Yes, again, I'm not saying that buying an X3 is sensible for everyone, but if it is, this is the way to do it. *That's* my point. You're for example making it sound like "paying R5200 a month to pay off 185k" is bad, but it's at 0.65%, which is practically free money.

 

Stated differently, If you have R763k cash right now and you're shopping for an X3, it would not make sense to buy it cash.

[Duane_Bosch]

Hmmm. I'd like to take you on about this because my overall point is still that I'm not talking about what to buy, I'm talking about how to buy it.

 

You're incorrect in stating that it would be stupid to go for this deal. I'm 99% sure that what you're intending to say is that it would be stupid to buy a R763k X3.

 

Mmm. Indeed. Thanks for the insight.

 

I'm only looking at this from a personal perspective. I should try to remove that when having this type of discussion.

 

You're right tho. Current me would never consider buying an X3 so I'm already entering the argument with a no and then probably shaping my point around that.

Edited September 10, 2020 by Duane_Bosch

[stefmeister]

Again, its down to personal circumstances. 

I have a number of high earning customers that rather finance over 72 months for a cash flow perspective.

Each to their own yes, but high earning does not equal good management of personal finances.

Again, what you're basically saying is, although they earn a lot, yet still spend too much for what they actually can afford. 

Edited September 10, 2020 by stefmeister

[The Ouzo]

One other thing to be aware of.

Many of these low interest deals are supsidised by the dealer, i.e. the dealer hands over part of their margin to the bank in order to buy you that rate from the bank.

This then leaves the dealer no margin to discount that car to you. 

So have the numbers worked out for you on a normal finance deal with discount and one of their "special" low interest rate deals. Sometimes it does not make financial sense to take the low interest rate deal.

[Steven Knoetze (sk27)]

Residual is from the devil!!!

Just my uneducated opinion, but based on my experiences.

 

You can either afford the car or not. Buy within your means.

[LazyTrailRider]

Again, what you're basically saying is, although they earn a lot, yet still spend too much for what they actually can afford. 

 

Sometimes, possibly, but it's not an assumption which can be made. Refer to my example...

Edited September 10, 2020 by LazyTrailRider