Friday, November 1, 2013

To Buy a Car or not to Buy a Car?

Haven’t you been curious why car down payments are becoming considerably low and financing approval becoming faster than ever? Hmm. Well of course all the banks would love to stash some cash away from all of us. How? Through the interest that we pay when we take some loans.

Few months ago we should have bought a car through bank financing. I already gave the reservation fee to the dealer and determined to get the car soon. But I did some research and compared financing schemes so I came up to a conclusion of not buying a brand new car today. I got the reservation fee and went away. ;)

I’d like to illustrate my point by taking a closer look at payment schemes presented by the sellers.

The 60 months pay scheme

The difference of the loan amount from that of the total payment is the total interest paid by the buyer. It is obvious from the illustration that the higher the down payment, the lower the interest paid in the long run. And if for instance I would take out the car by taking an 85% loan, I would have easily burnt almost 250000Php in interest alone.

The variable number of months pay scheme

From the illustration above, we can sum up that the faster you pay for the loan the lesser the amount of interest paid. But of course, a person paying 52000Php in amortization should have more than a hundred thousand salary per month to get in the deal. (Not me.)

How about we take a look at it on the other side?
Assuming that the car price is your final goal and you have initial savings equal to the desired down payment. Question is, how long should you invest the money (monthly amortization) at 12% interest rate so that you can come up with the amount needed to complete your final goal?

From the illustration above, it would only take you 3 years and 2 months (38 months) to complete the goal. This time interest becomes your best friend and it will work for you day and night.

Let us take a look at the other example. For instance you have 30% of the final goal already, how long do you need to save to achieve your final goal? 

It is noted from the example above that when you increase your monthly investment by a few thousands, you can achieve your final goal the sooner.

Where did I get 12% interest?
The 12% interest was derived from the average performance of Mutual Funds and other legit investment facilities in the Philippines. Click here for reference.

In conclusion
People who can wait and know where to put their money can have a very good advantage over the interest charges. Diligently saving and investing your hard earned money can be your ladder to achieve your dreams faster. It is also important to weigh your preferences. As the saying goes, "Patience is a virtue."

*Credits to Paul for helping out on the computation.

Please note that this post is based from our experience and how we deal with money matters. =)

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