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Buy a car and get an annuity.

Sunday, August 3, 2014

I think we have read enough articles from financial bloggers on why we should not be buying cars in Singapore. Although I am generally in agreement, I have also said that, for some people, a car is a need and not a want. 

Generally?

Yes, if having a car would make a person economically more productive, then, the car is actually an investment similar to a capital expenditure in a business. 

Of course, add the fact that a car would probably improve our quality of life, it becomes an even more sensible proposition. (See related post #1.)


So, whether something is a need or a want depends on a person's circumstances. Like with many things in life, it isn't as clear cut as some people might make it out to be. We must not be too dogmatic about things. There will always be exceptions.

Of course, for many people, I believe, who own cars in Singapore, it is really more a want than a need. All I have is anecdotal evidence, of course. Correct me, if you like.

If we want to have a car simply because it improves our quality of life, because we don't want to squeeze ourselves into crowded trains or buses (if we are lucky enough to actually get into one during rush hours), because we don't want to join long queues for taxis when we go shopping for grocery or bulky items, because we have children and old folks at home, for examples, and if we have the resources, then, go ahead.


What do I mean by having the resources? Well, it could be a bit extreme but, to me, it is not just having enough money for 50% of the price tag and taking a loan for the rest. 

To me, it is about having enough money to pay for the car in full without having to take a loan. A car loan is actually more expensive than it seems and I have blogged about this before. (See related post #2.)

So, when a friend told me that he is thinking of taking a 60% loan to buy a car because he has enough cash to pay 40% of the asking price, I told him he shouldn't and, of course, went on to explain why. 

Then, he said that his parents are willing to give him $60K to buy the car (the car's price tag being $100K) because it is spare money to them and not making much by way of interest income but he feels bad about taking their money. I told him he should consider it and that surprised him.

I told him that if he has set his mind on buying a car, then, nothing anyone says is going to stop him. Rather than taking a loan from a bank and paying interest, he should consider taking the money from his parents and paying them interest instead. That way, more money stays in the family. 

Yes, take it as a loan and not a gift.



A loan to buy a car now attracts about 2.8% in interest cost per annum. A $60,000 loan would attract an interest payment of $1,680 a year. Over a 5 year period, this amounts to $8,400.

So, if he were to pay his parents on a monthly basis over a 5 year period, it would mean paying them $1,140 a month. In a way, it would be like a short term annuity plan for his parents too.

Mind you, I am not saying that I support my friend's decision to buy a car when he doesn't need one. I am just trying to make the best of a bad situation, if you will. 

The way I look at it, my suggestion would help his family save $8,400 in interest payments to an external lender. This is enough to pay for 56 months of petrol, assuming an average of $150 a month.

Related post:
1. Money management: Needs and wants.
2. A car loan is different from a home loan.
3. First time car buyer? Get a Mercedes Benz!
4. Tea with AK: A new car for $75,000!
5. Tea with AK: Bought a new car.

14 comments:

Ray said...

the agent at borneo I spoke to when I was buying car back then said that they will sell car at a higher price if we don't take loan. (on hindsight, i think he lied to me maybe they get a cut of commission from the loans we take?)



AK71 said...

Hi Ray,

Yes, they get a commission from the bank if we take a loan buying the car from them. Usually, they will dangle a carrot like a $1,000 discount if we take the loan, for example.

If we don't take the loan, they don't get a commission from the bank and, so, they take away the discount.

The last time it happened to me, I told the salesman that if I don't get the discount, I will bring my business somewhere else. He checked with his manager and they agreed to give me the discount even though I wasn't taking a loan. :)

Matt said...

AK,

Seven years ago, when I was looking to buy a car for my wife, there were many distributors that won't sell without discount if you did not take a loan. Some even have a minimum amount you need to take.

I finally ended up with a Toyota Altis that cost 57k. The salesman convinced me to take a 24k loan for one year with an interest of $800 and gave me a discount of $1500.

Ray said...

Haa AK, u very good at bargaining. but provided you really OK with buying other brand car... coz cars like toyota have authorized dealers like borneo. So unless u really dont mind buying mazda, honda ...else you may be stuck with borneo.

Lim Der Shing said...

Personal even more conservative take, I advocate buying a car and all other depreciable, "want" items like handbags, watches etc provided total value is less than 5% of net worth. Probably applies only to hnwi and up, if you have say 5m net worth, this means at most buy a 200k car.

Reason is simple, live within our means and by investing the other 95%, we defer a few years and before you know it, your cap probably has grown to 300k.

AK71 said...

Hi Matt,

In your case, you still ended up with a discount, just a smaller one. It would work for me too. ;)

AK71 said...

Hi Ray,

Oh, I am not particular about which Japanese brand of cars I end up with really. LOL.

Anyway, it was a Mazda I bought and if I didn't get the discount, I would have bought a Honda. Really. I wasn't bluffing. :)

AK71 said...

Hi Der Shing,

To play the devil's advocate, it would also depend on whether the potential car buyer is savvy or willing to invest and grow his money. Many people simply do not have an investor's mentality, including many investors amongst us (myself included, sometimes). ;p

So, if someone in this category has made up his mind that he wants a car for whatever reason, then, if it is not going sink him into financial hardship, I am not going to stand in his way.

In the GFC, a friend told me that instead of investing his money in stocks, he should have spent the money on his dream car. His portfolio was down almost $200,000 back then. I kept quiet. LOL.

We can give advice with good intentions but how would the advice be interpreted? So, going for the middle ground could be the best strategy. Diplomacy. Compromise. ;p

temperament said...

Hi AK71,
Ha! Ha!
When i first read the "title" of your blogging, i think you are shuffling some cards. But it makes sense after i read the whole articles.
This is what we call, "Fei Shui Bu Liu Y Ren Tian"
(Pardon my horrible Hanyi Pingin)

AK71 said...

Hi temperament,

Haha... Well, this blog is about me talking to myself, remember? If it doesn't make sense to me, it would not be published. LOL!

Glad we are on the same wavelength here. ;p

betta man said...

Hi ak, on a side note, how is the reliability of your mazda and is servicing at trans eurocars expensive ?

AK71 said...

Hi betta man,

My family have had 4 Mazda cars in the last 20 years. No issues with reliability and I particularly like my little Mazda 2 now. Great driver's car. :)

As for servicing cost, under Trans Eurokars, the new distributor, one of my bills came up to $800 and I blogged about it! Well, it was supposed to be a major service. Usually, it is about $200 per service.

Cheaper service could be had in some third party workshops, I guess, but I have never tried them.

Lim Der Shing said...

Agree totally ak. It's a personal philosophy thing. In fact I keep all depreciable asset to under 2.5%. But of course I won't stand in the way of someone deciding how to spend their own money. Learned these things are none of my business a long time ago.

AK71 said...

Hi Der Shing,

Definitely, it is very personal. The choices we make will decide if we achieve financial freedom sooner or later or not at all.

We can lead horses to water but we can't make them drink. :)

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