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Vehicle finance
Today I thought I would explore vehicle finance further.
Then it turned out I could put it all into this one paragraph. Which applies to just about everything else too, not just cars:
Don’t worry about these fancy structured deals that you see advertised. You can study them and put a lot of effort into it and that’s good, but you will find in the end that the merchants make as much money through their fancy deals as they do through the usual deals. Of course, this makes sense if you think about it – in spite of the advertising, nobody is giving anything away – not really. 0% interest is not really 0% interest – how could it be?
And talking about focusing and not wasting your time, here is another useful thought that wraps up a lot of my thinking and researching:
Don’t pay any attention to any deal that someone tries to bring to your attention. Whether it’s an advert or a sales call or a personal visit, there is no such thing as the one in a million investment that you can’t afford to miss. If it’s coming to you, it’s good for the person who’s trying to get your attention – not you. Simple. Now you can safely ignore all adverts and most other attempts to get your attention – and get on with the things that really get you somewhere, like finding a real investment!
For those who like more detail, here’s the story on vehicle finance.
Firstly, when they advertise something like prime or 0% interest, they load the price (the capital) with the money they’re losing on the interest. For example, a R100 000 car will end up costing R130 000 or the exact amount it would have if you financed it in the usual way.
It’s just that they focus on the monthly repayments so it’s hidden. But it comes out the same.
Then there’s the residual story. This kind of deal is popular when inflation is high. This is because when it comes time to pay the residual or balloon payment at the end of the period, because of inflation the market value of the car may have risen to match it. Which appears to mean you are not out of pocket.
The other thing they do is lock you in for future deals because they may take the car as a trade-in, and add the cash discount for the new car to the price they give you for the old one. This means that you may get something like R20 000 more than the car’s market value, which another dealer will not give you.
So the deal works out the same, but you’re stuck with a Jaguar or a BMW or whatever car you first chose, whether you really want another one or not. Works for them ... how about you?
You will find with deals like both of these that there are a number of conditions, one of which is that you cannot take this deal to a bank for finance; it must be done in-house.
Also popular recently was the investment car deal, where you could drive a Ferrari for what looked like a reasonable amount of money every month. It seemed like a Ferrari just got more accessible for the ordinary person.
That’s what these deals are about: making the unaffordable seem affordable. But in the end if you can’t afford it, you can’t afford it – end of story.
I actually have a theory that with these fancy deals they are not really out to fool you: YOU are out to fool you – and they just give you the ammunition. The excuse. The whitewash. The smokescreen. Whatever you want to call it.
We want to fool ourselves and the marketers will help us do it any way they can.
Especially when it comes to status symbols like cars.
Once you see this, you will waste a lot less time and get a lot less confused about finance.
I know a lot about vehicle finance but I would love to be surprised. Tell me something I didn’t know! Dig a little; you may gain a lot for a little bit of time and effort!
Share your stories and vehicle finance experiences with us.
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Comments
With HP (Hire purchase) you pay monthly installments to purchase a vehicle which becomes your property when you have paid it off. Until then it is technically the bank's. That is why the monthly payments are higher for HP.
The choice between lease and HP can have an effect on your income tax. Best to discuss this with your bookkeeper.