The mathematics behind car ownership

[Iisterry]

COST OF CAR OWNERSHIP IN SINGAPORE

 

Many people embark on the quest for car ownership without realising the actual financial drain that they are placing upon themselves.

 

Here are some of the factors that are part and parcel of car ownership.

 

FACTORS

 

Monthly Installment

Conservative median average at $500/mth depending on loan duration.

The monthly installment for a car loan is calculated via the following formula.

{(Principal * Interest Rate * Loan Duration) + Principal} / Total No. of Months

 

Insurance

Conservative median average at $1,500/year or $125/mth.

 

Road Tax/Radio License

Approximately $700/year for 1500cc or $58/mth.

 

Petrol

Approximately $200/mth.

 

Maintenance

Approximately $60/mth on average over the lifespan of a car.

 

Parking

Season parking, parking at workplace/carparks. Approximately $200/mth.

 

ERP

Approximately $50/mth

 

Incidents

Conservative estimate of $100/mth over the lifespan of the car. Factoring for "accidents", upgrades, increased loading in insurance premium, etc.

 

Total

$500 + $125 + $58 + $200 + $60 + $200 + $50 + $100 = $1,293/mth for a 1,500cc car with a monthly installment of $500.

 

**Incidentally, a $70,000 amount compounded at a conservative rate of 4% per annum over 30 years is $227,000. At 8 % per annum, amount grows to $704,000.

 

CAR LOANS

 

Rule of 78. Car loan redemptions in Singapore are calculated using the Rule of 78. It is a method of allocating a loan's interest & principal. The rule applies most of the installment payments in the early years of the loan to payment of interest rather than principal. At any point which you wish to redeem your loan, the remaining principal is the balance (outstanding settlement amount). This is only applicable for cars whose total cost is <$55,000 excluding COE. For cars over $55,000, it is subjected to another devious scheme known as Common Law. There is an additional surcharge of 20% of the interest that the bank did not manage to earn.

 

There is an online calculator which can be used to calculate your full settlement at any point in time.

http://www.hughchou.org/calc/rule78.cgi

 

History. Rule of 78 was popular as a short-hand method for calculating the remaining interest on a loan in the days before financial calculators. In those early days, the rule of 78 was applied to all loans. Today it remains only for car loans. In other countries, like the US, the rule of 78 has been dropped. It is not permitted for car loans of more than 5 years and it is rarely used for loans less than 5 years.

 

Cash rebates. Cash rebates are a promotional tool used by banks to overcome the 70%/80%/90% maximum loan cap. It offers you cash upfront at the expense of higher interest rate. GE money was at one time offering 12 months installment rebate at 6.XX% for 10 years. That's almost double your principal! Cash rebate also comes with a lock in period where you cannot sell your car or you are subject to a hefty penalty on top of usual charges. This poses a problem when you need to sell your car or in event of a total car loss.

 

Should I pay more $ upfront or take a shorter loan?

This is entirely dependent on your profile. I'll show a few illustrations.

 

Case 1.

 

A) $70,000 loan for 5 years ($1,328 monthly)

B) 20% down & $56,000 loan for 7 years ($798 monthly)

 

If you intend to sell after 4 years.

 

A)

Full settlement amount - $15,523

Total installments paid - $63,744

Total cost - $79,267 ($15,523 + $63,744)

 

B)

Full settlement amount - $26,669

Total installments paid including $14,000 downpayment - $52,304

Total cost - $78,973 ($26,669 + $52,304)

 

If you intend to sell after 5 years.

 

A)

Full settlement amount - $0

Total installments paid - $79,625

Total cost - $79,625

 

B)

Full settlement amount - $18,224

Total installments paid including $14,000 downpayment - $61,880

Total cost - $80,104 ($18,224+ $61,880)

 

Case 2.

 

A) $70,000 loan for 7 years ($997 monthly)

B) 20% down & $56,000 loan for 10 years ($598 monthly)

 

If you intend to sell after 4 years.

 

A)

Full settlement amount - $33,327

Total installments paid - $47,856

Total cost - $81,183 ($33,327 + $47,856)

 

B)

Full settlement amount - $37,351

Total installments paid including $14,000 downpayment - $48,704

Total cost - $80,055 ($37,351 + $48,704)

 

If you intend to sell after 5 years.

 

A)

Full settlement amount - $22,772

Total installments paid - $59,820

Total cost - $82,592 ($22,772 + $59,820)

 

B)

Full settlement amount - $31,907

Total installments paid including $14,000 downpayment - $49,880

Total cost - $81,787 ($31,907 + $49,880)

 

*We can see that the upfront of 20% helps during the first 4-5 years where a person usually sells their car. The savings costs is usually around $1,000.

*However $14,000 compounded at 4% for 4 years translate to $16,378 or a gain of $2,378.

*Even if its compounded at only 3% for 4 years, the gain is $1,757.

 

Of course, situations differ on a case by case basis. It is always better to run your own numbers and determine which one suits you. It is always my opinion that a short term loan is better than a large down payment and a longer term loan. Always go for a short term loan. Your dealer makes less too.

 

"Break even" is subjective. Its normally termed as the date which your car valuation is greater than your outstanding amount. In actual fact, you never break even. You always lose money on cars.

 

The value of a car is simply based on the laws of supply and demand. If your car is still in demand, it'll fetch more than simply its paper + body value. Demand can be accrued to a few things. eg; make/model, market supply, year of manufacture, color, transmission type, etc...

 

Cars that do not have a strong demand locally are exported. Certain countries have an age limit on the cars that can be imported in. In Singapore, cars that are less than 3 years of age can be imported in and sold. So in inverse, the number of countries that it can be exported to reduces as the age of the vehicle increases.

Edited July 7, 2009 by Iisterry

[Blue850r]

BTW, did you try to use the above method to calculate how much you spend on meals on a yearly basis? to be realistic some meals are those restuarant type. It may not be far from those car cost. In a car, it serves you to your destination like going KL, Genting, etc... while food after processing will be ...bomb.

 

In life, you live to enjoy and spend the money to keep this enjoyment.

 

Lastly, the idea of car ownership is less loan and short loan. Howver, this method is not advantage to PI.

Edited June 27, 2009 by Blue850r

[Picanto]

not everything can be calculated with maths. owning a car is more of a desire than a need in spore.

[Sabretan]

yep,

 

in Spore, owning a car is consider a luxury rather than a must have. Despite all the complaints against our transport system, it is still one of the best in the world if you compare to other big cities like New York, Berlin, Mumbai etc.

 

car ownership is more of an addiction....and as we all know, addiction is expensive.

[Amortifiedpenguin]

text wall! omg.

[Ender]

Agreed more of desire than need. But when time to buy, most of us will go thru that mathametic excercise too to decide to loan for how long. Some just look into monthly payment, some more detail look at the overall and monthly payment as per TS's calculation.

Edited June 27, 2009 by Ender

[macrosszero]

Good post, this should be pinned

[Seaweed]

very interesting...it will be very very helpful to first time buyer...for me like what most say...used to it liao...so die die must have liao...70k save on a car may become 700k in 30 yrs....but too bad sometime u just need it...however i don't mind a cheap car....as it just serve as a transpot to me and nothing of status symbol...

[Xtravagant]

well explained and well commented. . .

 

it's more of a want than a need. . .

 

and i agree addiction = more $$$

 

[Felipe]

yep,

 

in Spore, owning a car is consider a luxury rather than a must have. Despite all the complaints against our transport system, it is still one of the best in the world if you compare to other big cities like New York, Berlin, Mumbai etc.

 

car ownership is more of an addiction....and as we all know, addiction is expensive.

 

 

but New York and Berlin have nice weather. Try squeezing in a bus or mrt, walking long distances and the heat is unbearable.

[Darryl]

Hi can you enlighten how you calculate the full-settlement amt?

[Guest Julio369]

again i have same question to ask:

 

why, oh why, when we sell our car, AD/PI & 2nd hand car dealer eat our car at paper value + miserable body. why????

 

and why, oh why, when car 2nd car dealer sell old car to you, they calculate based on depreciation value??

 

because of the above so call "system" or new trend (started in 2004?), car owner lost a lot of money( worst than shares)....and that's the very reason why nowadays car owner rather buy new car....and good that AD and PI knew about this or they are behind it????

 

i predict after this wave of long loan & zero installment of car ownership, some with 10 yr loans may find it cheaper to extend the COE for their existing car, hence more old cars in the next 10-20 years....or sell at big loss, buy another new car and cycle cont'd..........many Singaporean will retire with not much savings left, especially those with 30 yrs loan for expensive houses

 

imagine how much $$$ you can have for retirement, with compund interest, if you save on the monthly car instalment., you'll be amazed.

 

& look at malaysia, they treat their car like junk, and their car can serve them a life time ( i still can see many proton saga around).

we treat our car like gems, but sell away in 3 to 5yrs time.

 

BUT then again, we need to jutify our hardwork/ success/ status/ convenince/ job requiement, whatever, and get a new ride, because everybody doing it. die all die together.

Edited June 28, 2009 by Julio369

[Picanto]

again i have same question to ask:

 

imagine how much $$$ you can have for retirement, with compund interest, if you save on the monthly car instalment., you'll be amazed.

 

& look at malaysia, they treat their car like junk, and their car can serve them a life time ( i still can see many proton saga around).

we treat our car like gems, but sell away in 3 to 5yrs time.

 

BUT then again, we need to jutify our hardwork/ success/ status/ convenince/ job requiement, whatever, and get a new ride, because everybody doing it. die all die together.

 

we may be able to save a lot for retirement if we dun buy cars. but life sometimes is unpredictable.

moreover the $ saved cannot bring to the grave. we only live once, so we try to enjoy the cars bought with $$.

[Iisterry]

Hi can you enlighten how you calculate the full-settlement amt?

 

Hi Darryl

 

Please refer to the following.

 

Rule of 78. Car loan redemptions in Singapore are calculated using the Rule of 78. It is a method of allocating a loan's interest & principal. The rule applies most of the installment payments in the early years of the loan to payment of interest rather than principal. At any point which you wish to redeem your loan, the remaining principal is the balance (outstanding settlement amount). This is only applicable for cars whose total cost is <$55,000 excluding COE. For cars over $55,000, it is subjected to another devious scheme known as Common Law. There is an additional surcharge of 20% of the interest that the bank did not manage to earn.

 

There is an online calculator which can be used to calculate your full settlement at any point in time.

http://www.hughchou.org/calc/rule78.cgi

 

again i have same question to ask:

 

why, oh why, when we sell our car, AD/PI & 2nd hand car dealer eat our car at paper value + miserable body. why????

 

and why, oh why, when car 2nd car dealer sell old car to you, they calculate based on depreciation value??

 

because of the above so call "system" or new trend (started in 2004?), car owner lost a lot of money( worst than shares)....and that's the very reason why nowadays car owner rather buy new car....and good that AD and PI knew about this or they are behind it????

 

It is all about economics. If they take in at the same price that they are going to sell to others and be liable for repairs/maintenance/warranty, etc, they will be closing down very quickly.

 

The reason that many people preferred new cars this past 6 months is because COE was low. For 2nd hand cars, COE was skyhigh if you recall the range for the past few years.

 

Picanto is right. Its all about balancing your want/need. You can be a miser and die rich or enjoy the little luxuries in life while you still can. It is all about striking a balance. This post is just to bring awareness of the implications of owning a car and the difference between a long/short-term loan/downpayment.

Edited June 28, 2009 by Iisterry

[Friendstar]

luckily i don't have to take loan for my 2 cars

[Maffie]

nice information

[Eyke]

Hi can you enlighten how you calculate the full-settlement amt?

 

fast: call your finance coy and ask

diy: check your finance agreement for how to calculate, and terms and conditions

 

[Mkl22]

the other thing that many do not realise is that a lot down pay very little and loan a lot and long. The main issue comes when you are out of a job and need to sell the car or get into a major accident where the car will be written off. Then you'll be hard pressed to come up with the cash to clear the loan. In the end, its never about the monthly costs. but you still need some reserves to pay off the loan if needed.unless you dun care and bankrupt bankrupt lor.