Extra Car Loan Repayment

[Bandit]

Let's assume you've bought a car for R200,000 with a 25% balloon payment (R50,000) over 60 months.

 

Now let's assume you can make an additional lump sum payment every couple of months. Do you ask the bank to...

 

1. Recalculate ypurmo monthly repayments (so pay less every month but still for the remainder of the 60 months term).

 

2. Keep the monthly repayment the same but for a shorter term, effectively paying less interest.

 

3. Reduce the balloon amount.

[Purply]

Interesting question, I suppose it depends on how long you planning on keeping the car?

[mogiletsi]

Let's assume you've bought a car for R200,000 with a 25% balloon payment (R50,000) over 60 months.

 

Now let's assume you can make an additional lump sum payment every couple of months. Do you ask the bank to...

 

1. Recalculate ypurmo monthly repayments (so pay less every month but still for the remainder of the 60 months term).

 

2. Keep the monthly repayment the same but for a shorter term, effectively paying less interest.

 

3. Reduce the balloon amount.

 

 

 

I believe a balloon payment is subject to interest too, get rid of it. It does reduce accumulated moonthly payments at end (slightly), but deposits kill interest. Balloon payment is like the evil brother of a deposit, always aim to give a deposit, else you simply cannot afford the car. 100% finance is stupid

 

Interest thrives with more time so get refinanced over a shorter period, averaging out the extra cash over given periods to increase monthly contribution. This may get you a reduce interest rate.

[Bandit]

Interesting question, I suppose it depends on how long you planning on keeping the car?

 

Me? What no... asking for a friend....

[Purply]

I agree with Mogi, refinance over shorter period would make the most financial sense, unless said person is planning on trading in for an upgrade after say 3 - 5 years, then it's a completely different story.

[Bandit]

I believe a balloon payment is subject to interest too, get rid of it. It does reduce accumulated moonthly payments at end (slightly), but deposits kill interest. Balloon payment is like the evil brother of a deposit, always aim to give a deposit, else you simply cannot afford the car. 100% finance is stupid

 

Interest thrives with more time so get refinanced over a shorter period, averaging out the extra cash over given periods to increase monthly contribution. This may get you a reduce interest rate.

 

If I'm not mistaken they work out the interest that needs to be paid on the full amount, subtract the balloon from the final amount and let you pay off what's left. So yes, still paying interest.

 

BUT, if you can afford that lump sum at the end or even "gamble" that what you save and push it into an investment account that gives you better growth than the loan interests (Offshore ETF...Naspers... Bitcoin.... this is getting BAD) then I reckon you may actually score if you balance and execute it correctly.

[mogiletsi]

 

 

 

BUT, if you can afford that lump sum at the end or even "gamble" that what you save and push it into an investment account that gives you better growth than the loan interests (Offshore ETF...Naspers... Bitcoin.... this is getting BAD) then I reckon you may actually score if you balance and execute it correctly.

 

This idea of holding back on buying a car (depreciating asset) in cash and investing it in a lump sum/DCA is too risky. The minute you get into that brand new car, that car depreciates by at least 20% - that's an immediate loss. Further depreciation and along with added interest on top (with interest added to principle) is crazy. Buying cash will only result in the depreciation being the contributor to loss and not interest as well.

 

 Let us imagine:

 

buys car cash @ R200k - 20% depreciation = R160k; day 1

year 5 (further depreciation) = R80k value

 

*invest what would have been monthly repayments (excl insurance) using dollar cost averaging @ 4k per month in broad ETF (SWIX40 2012-2017 getting 9%  pa (conservative)= 300k total - (240k principle) = 60k growth

 

return on investment = R80k(car value) - R200k(deposit)  = -R120k (loss on car) + 60k (DCA INVESTMENT profit) = -60k in assets (car + shares)

 

buy car with 0% deposit at 10% p/a interest (pretty good rate)

invest 200k cash in broad ETF (SWIX40); 2012 - 2017 = getting 12.5% pa (pretty good) = R360k total - (200k principle) = 160k growth

 

bank loan amount = -R200k (principle loan) + (-R120k (total interest after 5 years)

value of car after 5 years = R80k

 

return on investment = R80k  (value of car)- (R200k (principle loan)+R120k (added interest)) = -R240k + 120k (LUMP SUM INVESTMENT profit) =  -R120k in assets (car + shares)

 

 

-R120k (100% loan, invest lump sum) > -R60k (100% deposit, invest monthly repayments. Even with DCA growth)

 

You've lost double the money than with lump sum deposit, even with performance of lump sum investment being good compared to conservative DCA and a good interest rate for car. Also DCA investments were low in comparison to what would've been true monthyl repayments (over 5k) - in other words, interest rates favoured the lump sum investment + 100% finance - imagine if it were the same, not pretty

 

 

Moral: avoid taking a loan that incurs interest, which would eat away at the performance of other investments. Settle your debts on depreciating items (car, credit card), then invest. There is no balancing of bad debt and investments, really. Kill the bad debt and work on growth from there. NOBODY CAN ASSUME THAT THE PERFORMANCE OF THE MARKET WILL BEAT THE INTEREST RATE THE BANK GIVES YOU -  just look at the last 3 years

[Bandit]

For the sake of this thread, let's assume the guy buying is fully aware of the "bad" financial decision he is about to make and have his emergency fund, income protectors and investments (TFSA, pension, RA etc) sorted.

 

Let's assume what the guy wants to know is the best approach in repaying a car.