Finance terms are getting out of hand
Iwas recently alerted to the fact that car buyers nowadays have the option of taking out finance over 96 months. I honestly wasn’t aware of this as the last time I took notice of the repayment options, the maximum allowed instalment sale was over 72 months. And not that long before it was ‘‘only’’ 54.
But 96 takes the cake. That is eight years!
I understand that tough economic times and rising new car prices make it very difficult – in many cases even impossible – to buy a new car or any car for that matter. Obviously the theory applies of the longer the repayment term the more affordable it will become. Notwithstanding the fact you will pay more interest the longer the period, the affordability of the monthly repayment is the big drawcard.
Take mortgage bonds for example. For many years financial institutions were only allowed to permit bonds with a maximum repayment period of 20 years. Later that was increased to 30 years.
But that applies to property and that in itself is classified as an asset. Cars, on the other hand, classics and collectables aside, are liabilities in the sense that they depreciate with every passing month and year. And even though your insurance might decrease too, your repayments certainly don’t.
Let’s say you buy property for R500 000 and sell it for R700 000 after ten years, chances are that you have at least made up all the interest you paid to the bank over the decade.
But go and buy a car for R300 000 and see what trade-in price you are offered after four years. Depending on what brand of car you bought, it will range from decent to embarrassing.
Let’s work on a trade-in price of R200 000 if you’re lucky after you’ve paid off R300 000 without paying a deposit at prime rate plus two over four years. You would have paid close to R80 000 in interest over 48 months.
Now calculate paying back R300 000 at the similar interest rate over 96 months. Interest will amount to around R170 000 on top of the purchase price, meaning the total repayment will work out to close to half a million rand. And your return? Probably a trade in price of around R80 000 which will be nothing more than a little deposit on a new car seeing that the price of a similar car to the one you bought might have swollen from R300 000 to over R700 000. If your car isn’t renowned for holding its value, the trade-in might be a few dozen lower even.
Uber anyone?