Friday, July 6, 2007

When is your Ride Breaking-Even?

I came across this discussion on the OneMotoring Forum and wonder if I would even break even on my car. Below are some extracts from the discussion.
The so-called ‘break-even’ date is the time when yr outstanding bank loan amount is equal or greater than the market value of yr ride (in the case of COE cars, market value = scrap value + scrap metal token $$). This is not applicable if yr ride is already loan-free.
See Ho Ee:
I am always intrigue by this ‘breakeven’ date, and how car-owners used them to decide when to change ride or get rid of their ride. Based on this definition: the breakeven date depends very much on loan amount ($) and duration (yrs).
1) If you take a loan (at 70% of total value of car for 7 years) and let this be $49k (principal + interest), repayment is $7k per year. Since PARF rebate is highest before the 5th year, it is most likely that breakeven date is ard 3 yrs.
2) If the same loan is change to 5 years tenure, the breakeven is slightly less than 2 yrs.
3) If you change this to 3 yrs tenure, the breakeven is slightly over 1 yr.
4) If you don’t take a loan, any day is breakeven.
Hence, it can be concluded that the breakeven serves no purpose. It is all about affordability. If you can afford, no loan needed. If you cannot afford, you stretch (max) your loan as long as possible. To use the residual value (PARF + COE) to pay off loan is really no brainer! It is still borrowing that you have to repay!
Therefore, back to my contention in previous posts: that buying a car of your choice all boils down to two factors:
1) falling in love with the particular made/model
2) affordability
The balanced equity point is what the non-accountants called ‘breakeven’. I had a hard time trying to understand this term as much as the terminology called ‘COE car’. I thought all cars on SG roads required COE. So if there is COE car, there must be oso be non COE car? That was what went thru my mind! Well the motoring industry is full of ‘beng’ terms. “Break-even” is a term used in economics referring to the point where the cost and the revenue is equal (also profit = zero).
For motoring, the appropriate term should be equity of the vehicle. There are three kinds of vehicle equity:
  1. Negative equity is when the amount you owe for the loan on the vehicle is more than the vehicle’s market worth. This is where dealer will offer overtrading ie. loan a larger amount than the cost of the new car to cover the prepayment on the old car.
  2. Zero equity is the point when the amount you owe on the vehicle is about equal to the vehicle’ market worth.
  3. Positive equity is when the amount you still owe on the vehicle is less than the vehicle’s market worth. Buying a car using cash keeps you in positive ground.
    If you are at point 1, I would not advise you to overtrade as it will put you deeper into the negative zone.
I have revised the Cost of Ownership tool to reflect the vehicle entity as well as allow the Overtrade Loan ie. Loan Amount is greater than New Car Price to settle the prepayment of the outstanding loan on the existing car. The worksheet will show you how the new ride in an overtrade deal will become a significantly negative equity …. so do consider carefully before signing on the sales agreement.


skxly said...

See archived comments at

Anonymous said...

Hi, I downloaded your SMFinCostOfOwnershipNewCarV25 calculator and it really gives a detailed info on the value of my new car. But it was read-only so I cant do anything to aid my reading and had to strain my eyes to see which yr is which...Can i have the pword for this so that i can make it easier for my reference? u can email to me at


rubberduckie said...

hi, due to poor financial planning, i made a deadly mistake of taking not only a 10 year loan , but also took up a cash rebate.

Along the years i have wisened up and saved diligently. I intend to early settle the car next year. Looking at the options i have now, do you think it is wiser to pay the 15K to the bank now so i have lesser of outstanding amount when i sell off the car , or should i hold out and pay the difference only upon full settlement ?

skxly said...

You have committed to the 10-year loan and pre-paying it offset little interest rebate. I think you may do better investing the money to get some returns.