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How to buy your bank a car

It’s stupid, but most South Africans do it.

Wait, what?

Why would you want to buy your bank a car, that’s just stupid?

You’re right, it is stupid. Yet millions of South Africans do it! And in fact a lot of people will buy their banks three or even four cars over their lifetime.

It seems to indicate that despite all the moaning and groaning, South Africans actually love their banks. A lot!

While this may sound ridiculous, you will soon realise that it is not so far-fetched after all. Let’s consider a hypothetical South African. We will call him Peter.

Peter starts his working career at age 20, and soon realises he needs a car. Of course since Peter has only just started working, he has no savings to speak of, and so his only real choice is to finance his first car. This is how many people (myself included) start their financial journey, and unless you are fortunate enough to have been given a car by your generous parents, there isn’t really any other choice.

Being at the bottom of the career ladder, and the matching pay to go with it, Peter is somewhat conservative with his approach, and he decides to get a R100 000 car. Nothing fancy, but a decent second hand option. He takes out a loan for 100% of the purchase price, and manages to get finance over 60 months at an above prime rate of 12%.

I am sure you agree, that this is a pretty average purchase – a monthly instalment of R2 224 and some change seems like a reasonable ask.

Time moves on, and Peter diligently makes his monthly payments. After five years his car debt has been fully settled. At the end of the 60 months, Peter would have paid a total of R133 467. In other words Peter would have paid around a third of the R100 000 purchase price over to the bank in the form of interest. While this is of course not ideal, Peter didn’t really have a choice and so I think he can be forgiven. The real problem is what most people do after this point. So let’s continue.

After the five years, Peter has climbed a few rungs up the corporate ladder, and now earns a slightly better paycheck. And of course he now no longer has that pesky car payment to deal with. This is great! He tells himself that he works hard for his money, and he deserves to drive a better car. So he trades in his current car (not worth that much any more after the effects of depreciation) and uses that as a deposit. In a mad stroke of luck and coincidence, Peter finds another car which requires exactly another R100 000 finance deal over five years at 12%.

The finance deal runs it’s course, and again, after the five years are up, Peter has paid another 1/3 of a car over to his bank in the form of interest. In total, Peter has now now bought his bank 2/3 of a car. At this point he has also progressed further up the corporate ladder, earns slightly more, and now of course “deserves” an even better car…

I think you can see the pattern here. After the third iteration of this pretty “normal” behaviour, Peter would have bought his bank a full car. Why thanks Peter, your bank loves you too!

And of course this can continue in this way for many many more cars. I have summarised the outcome below.

 

 

As you can see, for every three cars financed at 12% over five years (such as Peter), you would end up buying your bank a car.

Now how many cars do you think most people finance in their lifetime?

I am willing to guess that in a 60-year period (say from age 20 to age 80) this could easily be nine cars. And if each of these cars are bought and financed in a similar way to how Peter did it, the bank would end up getting three cars!

Now of course you can argue that a person could get better interest rates as they became older and build up a credit record, they may not always upgrade their car, and they might drive their car for longer than five years, etc. etc. – but I think you get the point. (On the other side of this coin though, I haven’t even considered that some people opt for financial suicide balloon finance and end up buying their banks a whole fleet of cars.)

Out of interest (pun intended), I have put together a table which shows how many cars a person would end up buying their bank for each car according to the number of cars they financed over five years at the given interest rate.

 

Even at low interest rates, if you continuously finance your car purchases, you are going to be buying your bank some cars.

Ten cars financed at 14% means you give your bank four whole cars! How thoughtful of you! Such generosity is seldom seen – even among husbands and wives. This forces me to ask – do South Africans love their banks more than their spouses? It appears that way!

Is there a better way?

I am now going to say what everybody already knows, but what few people end up doing.

There is a much better way to this whole car finance thing, and it will leave you hundreds of thousands (if not millions) of rands better off in the long run.

  1. Try pay extra towards any current car debt. The sooner you can settle outstanding car debt, the sooner you can free up the monthly payment (and the extra monthly payment).
  2. A paid off car is not a signal that it is time to buy a new car. In this day and age, with modern manufacturing and quality, chances are that you can easily get ten, 15 and possibly even 20 years of trouble free motoring out of a car. Drive your current car for as long as possible.
  3. And now the key to really getting ahead – once you have the money freed up from (1) and you are still driving your current car from (2), use at least some of the freed up money to save up so you can purchase your next car cash. Once your car is paid off, take that monthly payment and start paying yourself over the the equivalent number of years it took you to pay off your car loan. This will enable you to easily afford not only an equivalent car, but probably an even better car. (Although I strongly suspect that if you get to this point, you won’t even want the upgrade!)
Super easy in theory!

In practice?

Well, just take a look at any South African parking lot…

This article was originally published on stealthywealth.co.za, a blog that tracks Stealthy’s journey towards financial freedom by 2030.

COMMENTS   35

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Very true. But what is not mentioned in the article is that the bank doesn’t actually have the R100 000 to loan you. You created the currency with your debt. The bank creates R100 000 in digital currency from nothing and loans you this make believe money and charges you massive interest. Pretty good scam

yeah but if you run away with the car, the banks have to pay back the money that you created. So think of the interest as helping you out and trusting you cost.

Yes Pierre, hence it must be a conspiracy theory…

Ai jai jai. It is not a scam. It is just the way money is created in a modern economy. Please go study any entry level economics textbook.

Preach it! You could add the numbers on the “but it’s only x per month!” sales tactics…

How long does it take for a comment to register? It seems that the moderators are fast asleep.

Banks dont have the money they loan. They create it out of thin air with your debt. Is that better moderator?

This is an wholly inaccurate comment, banks use depositors money to on lend. They can’t create debt out of nothing otherwise everybody and their dog would be a money lender. The car sales company would get paid out for the asset in cash and the bank create the debt in their books.
Appro pro the article there is such a thing as negotiation with your banks as to interest rate, repayment period (I get 72 months, but pay off in 36 months) and you require your monthly repayment to be adjusted each time you make a balloon payment which should be paid during the course of the contract and not at the end. So test you bank and see how far they are prepared to negotiate

I think you’re confusing the fractional reserve system with the reserve bank who can print money ex nihilo.

Banks (Like ABSA or Standard bank) borrow money from the reserve bank at the repo rate (6.75%) and then lend that money to clients at or around the prime interest rate (10.25%). So your average bank does not create money from nothing. They just get a cut (prime minus repo) The reserve bank creates the money from nothing. The interest it then gets on that money as well as any repayments of any money originally lent out vanishes again when the reserve bank gets it back. This is my understanding. Please correct me if I am wrong.

This totally ignores time value of money. On a financial site? Really?

It also ignores the value Peter got from driving the car which could be considerable.

Well, after 5 years Peters second hand car is now really going to cost him in maintenance and up keep. All modern car have a plan obsolescence and with all the electronic gadgetry, overstressed engines in the name of co2 omission etc.

So its come down to the choice of either buying the bank a car or you Stealer, sorry franchise dealer a car, boat and island vacation

It’s no where NEAR as bad as you mentioned, and when you start running the numbers with regard to the annual savings in interest, insurance and the fact that you now no longer HAVE to use the dealership mechanics, the supposed risk of maintenance costs is paid for many times over. Then I haven’t even factored in the savings with respect to depreciation. My 14 year old Audi A4 diesel is still as efficient as many of the newer models on the market and last year cost me R2 800 for the serivce with an insurance premium of R150/month.

My husband used to be a big sceptic and had bougth the whole “must replace every 5 years because of maintenance costs!” thing hook line and sinker. Ask yourself a different question – if the maintenance costs where really THAT bad, why is there a booming second hand car market? Why do you still see 15 year old cars on the road?

Excuse me, but your 14 year old diesel is nowhwere near as efficient as new engines and do you have any idea how much diesels pollute?

Completely agree with Carmen as well, I have learned two valuable lessons from owning a 2004 Citroen HDi, that I bought from my dad who bought it brand new with a balloon payment.

1) Never ever fall the balloon payment “scheme” – Thankfully we saved up the cash in the 5 years to pay the balloon payment at the end of the term.

I am driving over 2800km per month(un-reimbursed), my fuel usage is averaged at 5.7 l/100km over the past year. I had a bad year in terms of maintenance as I had to do a cam-belt service, a tension pulley, a brand new clutch and fix a leak in the aircon, it all cost me R22 000, however because the car is so old, my depreciation on value was only R4000 over this year.

2) Cars are bad debt, pay cash and use the car for its worth – Getting you from A to B.

I have made the wise decision to keep the car last year and have been saving an equivalent to repayment per month in my flexible house bond, ensuring there is always cash available for maintenance and it feels like complete freedom seeing my home bond shrinking. Due to the depreciation of cars I cannot convince myself to sell my citroen. Valued at only R36 000, I would lose that amount in depreciation on almost any new car in the first year, so for every year I drive my Citroen I feel like a winner.

Agree with Carmen here. Have also done the sums…older car maintenance (even with turbos going bad) is still cheaper than brand new car depreciation over time, and higher insurance/instalments.

Strange thing how people run into huge fear when their luxury German car is nearing the factory warranty/maintenance plan period end. Instead of fearing to pay maybe say R50,000 on major maintenance like engine-overhaul, but instead they’re happy to pay a few hundred thousand overpriced for something else new.

That’s why large luxury cars are given away almost free after maint plan ran out 😉 The 2nd hand buyer mostly pay for maintenance, and get car for almost nothing (compared to new).

Furthermore, the “true market price” of a new car is not the sticker on the dealer showroom floor…example, if that same car is sold privately after ONE month of ownership (still virtually new, with full warranty)…the price received from another buyer…that is the real (reduced) price of the car one actually bought brand new.

I must give credit to the SA car industry’s excellent marketing campaigns: they got (most) S’Africans hook line and sinker. We’re a car mad nation. And the car buying public has been brainwashed or conditioned over the past few decades what a new car should cost locally…

Well, I followed this exact same advice, and it’s true. Once you start paying yourself, you don’t want to upgrade. My last car was 12 years old (paid off after 3) and I grudgingly bought a demo cash at 1/3 the price I can actually afford to buy cash. This demo I will drive for 12+ years if possible, and I will never finance a car in my lifetime again. It will just hold you back. So if you want to pour yourself financial cement shoes go ahead and buy a new car every 3-5 years and have it financed. It’s just plain stupid. Let common sense prevail, because it will be too late to cry in retirement.

Agree with you Koos.

But…shhh…don’t go and tell everyone to keep cars for that long (…it’s bad for dealers’ business).
Best to encourage people to buy new every 3-5 years…in that way (i) they keep the economy going (at their cost!), and (ii) it allows for them to take the brunt in depreciation…for the used car buyer to exploit 😉

(..for the rest of us, we’ll have to shut up and keep the financial secret to ourselves)

I did the following – I took an overdraught and I paid the equivalent of the hire purchace price back on the overdraught.
For the above example AND a overdraught % of 15%, you get
Hire purchase: buy for R100 000 and pay back R160 000
Overdraught: buy for R100 000 and total payback R135 779 (use the R2 666 of the hire purchase as your overdraught payment, and you pay the car of in 50 months).
THEN keep on paying the R2 666 into an investment account, after all you are used to cope the month without that money!

And yes you have to fight with the bank but I cornered them with “how can I be credit worthy for R160 000 but not for R135 779?”
I was then told that with a hire purchase they’ve got my address (in case I stop paying) so I promptly said in that case I’ll stop paying my home loan seeing that they don’t have my address.
Sjoe!
Eish!

I hope nobody but my children follow this advice. As an owner (shareholder) of banks, I need somebody to pay my dividends and boost the capital appreciation of my shares. I took the money I saved up to buy a Maserati, to buy a bank.

So, please ignore this article. Buy the most expensive car your bank is willing to finance. It is good for the economy, so be a patriot and enslave yourself to me. I am willing to finance you if you like that piece of plastic, metal and rubber. I get a real feeling of accomplishment and pride when you drive past me in that expensive car of yours.

Lol, no-one does this. We all buy cars with cash. In fact we don’t even buy cars, we use public transport. You clearly think we’re stupid to fall for this gimmick. Next you’re going to tell me that people buy cellphones and macbooks on credit too lol!

“paycheck”. Really? Was this simply republished from an American site without being proof read or does the writer have that tenuous a grasp on the English language?

I’m not sure which is worse.

This all assumes that you have no other debt. Car finance is pretty cheap compared to unsecured borrowing. If you have a credit card you’re more likely paying 20%, not the 12% for a car loan. So until you’ve sorted out your expensive debt you should carry on buying the car for the bank.

The author is confusing money with currency. Money is what money does which is the stuff that is commonly used to settle debts and be exchanged for purchases. Economics 101/102. If it can buy less things then its less money. Currency is that stuff that the authorities claim to be money. Often these two are similar but seldom identical. 50 years ago a Rand was a lot more money then it is now but its still a Rand. A rand is money in South Africa but not necessarily money in Iceland. Idi Amin statement that it was impossible for Uganda to go broke because he could just print more money is not true because then the Shilling would cease to be money. If you and a foreigner buy the same share which goes down in price but your currency depreciates more do you make money and the foreigner lose. If the bank lends you Rands and the inflation is more then the interest rate. Who profits out of the deal.

“In a mad stroke of luck and coincidence, Peter finds another car which requires exactly another R100k finance deal over 5 years at 12%.” Where does this happen if his original car was not worth much? Peter would have taken a serious step back if he does this and would he actually have been cash strapped when he bought his first car. Inflation exists.

Although there is a lot of virtue in thrift the reason given in this article are not them. This is a crap misleading article. Moneyweb should never have reposted it.

Funny comments in here…well one knows what is best for them.

I did a similar thing with my cellphone and medical aid. My next target is to replace my comprehensive car insurance with the MUCH cheaper theft and liability one. Working with cash is awesome and seeing your investment account increasing month by month is extremely satisfying. It is in fact VERY difficult to use the money to buy the thing you were saving for.

The real crime is the EXORBITANT interest rates we pay in this country for all our loans – vehicle, home, personal, credit cards… you name it! That is why so many people cannot afford to purchase cars and drive around in old clunkers (including me).

Bit of a ridiculous article. Oversimplifies things massively. Fails to take into account inflation over the finance period (meaning the bank actually earns a much smaller profit at the end of it all then suggested), losses suffered by the bank on finance agreements which the creditors default on (which are many!) and seems to suggest that a bank attempting to make a profit on one of its products is somehow reprehensible. I suppose banks should offer finance at no cost (or maybe at interest rates matching the CPI, if we’re being generous), supermarkets should sell food at cost price, doctors should treat patients for free and charge only the cost price of medication, etc.

OOm Soutie has a point and the article is not 100% accurate. If you agree that the value of the product is R100k then you get the car that you would have paid R100k out of your savings account for, earning 6%-8%. So the real margin you are paying your bank is the 6% (12%-6%). So the cars you buy your bank is half what is stated in the article.

Is your car worth your utils in comfort and safety..? For me financing when needed is doing a job.

I do however agree on keeping your vehicle longer and the 1 aspect that was forgotten in the argument is the 14% VAT you throw down the black hole which is a direct additional expense to you.

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