Friday, August 3, 2007

Costly Frequent Car Refresh?

There was a report "Eight out of 10 cars here less than 4 years old" in the Strait Times today. You can see the age distribution of the vehicle population on OneMotoring website

The article stated that many motorists are changing their rides every two to three years with the decreasing car price over the past few years. I agree with the reporter Christopher Tan that car price has bottomed out and seems to be on the up trend. Thus, it may not be possible for motorists to trade in for a new car and to continue with instalment payments of the same amount.

Although it is nice to be driving a new car every two years, it is an expensive habit for these reasons:
1. The depreciation rate is highest in its initial three years.
2. The Rule of 78 interest rebate gives your banker the edge on the loan prepayment.
3. The UV film, sports rims, low-profile tyres and other accessories have a much longer useful life than 2 years.
4. While one may argue that a new car will not be prone to breakdown, you are likely to send it back to the authorized service agent and thus, pay a premium for the regular servicing.

In my case, I live near my office and also travel overseas every other month. Thus, I have only chalked up much mileage when I drive up Malaysia for my holidays. My reliable MPV is now FIVE years old and the odometer only reads 94,xxx kilometres. If your mileage is low, it makes sense to stay with your ride since it is able to endure more wear and tear. The export buyers are happy to take Singapore deregistered cars as most of them are in great condition.

You can get a better understanding of the depreciation and finance cost using the Cost of Ownership tool. You should always analyze the financial commitment of upgrading to a new ride. The illustration from the dealer is always showing the average cost over ten years but the cost of ownership is not uniformly distributed. You can get an estimate of the cost of ownership based on which you are intend to sell your new ride.

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