Used Car versus New Car

Anonymous said...
"Hi Skxly,

Great to come across your blogs, you did a very good job on providing us the very useful infos and tools :) I'm looking for a cheaper car as my daily transport for working, i don't care whether it's used car or new car as long as it's cheaper.

I'm a new learner on buying car. Would you mind to give me opinion among 2 cars below, which one is value to buy?

USED CAR
========
Date Posted 18-Mar-2009
Ad ID CAR-28873
Expiry Date 10-Jul-2009
Description
Make & Model Kia Picanto GL 1.1

Price S$ 13,500
Type Hatchback

Engine Capacity 1,086 CC

Transmission Manual

Additional Information Description:

* Well Maintained And Marvellous Condition
* Accident Free
* Full Original Condition

OMV S$ 7,445
Depreciation S$ 1,705 / year
Registration Date 25/04/2006
COE N.A.
COE Expiry 24-Apr-2016
Number of Owners 1
Mileage 22,000 km

NEW CAR
=======
Price:
S$ 29,999
Last Updated:
05 Mar 2009
COE (CAT A):
S$ 4,890 (Last updated: 04 Mar 2009)
Monthly Instalment:
N.A.
Vehicle Type:
Hatchback
Engine Capacity:
1,086 CC
Transmission:
Manual

The price showned in USED CAR ad is the total price that I need to pay? Does it include the COE? I find quite confusing to read the ad.. Need separate MOV payment or it alraedy included in the price stated? If the Total price is 0k or below, i plan to pay by cash.

Otherwise, anything above 20k i need to take up loan. The new car price included COE? The ad states price is inclusive of registratration, road tax, etc.. But i dunno the registration meant for COE or not."

skxly:

Well, a used car should always be cheaper than a brand new car since the valuation will fall steeply in the earlier years of usage. The other exception is when COE quota premium increases offset the depreciation.

You should check with the used car dealer about the advertisement and get the breakdown details of all payment components. One additional payment for used car is the transfer fees payable to LTA. The price $13,500 does not result in a depreciation of $1,705 over 7 years; it should be $1,397 if $13,500 is the final price you pay. I believe that $1,705 includes the loan interest, transfer fees and others.

If you buy the Picanto new, your depreciation is $2,628 per year over the 10 years. Your consideration should be centered on the condition of the used car. If it is very road worthy and free of maintenance trouble, the used one is an obvious choice from the economic perspective. You can use the tool at my blog post Total Cost of Ownership to understand how much you will have to spend on each option.

Hope this helps. Remember that you have to pay a premium to have a new car...

Currency Impact on Car Purchase

Anonymous said...
"Hi, would you be able to do an analysis between currency fluctuations and car prices / OMV / market / car distributors profits? With the current movement in korean / japanese currency, will be interested to know your thoughts. =)"

Well, I don't possess the knowledge and experience to make a good analysis of currency impact on those factors. I can give my layman perspective from a buyer's point of view:

1. Movement of Currency against S$
As the Korean Won has fallen against the US$ at a faster rate than against the S$, Korean cars should be cheaper now. However, there are other factors and time lack before impact from the rate change kicks in.

2. Distributors' profits
Distributors faced currency fluctuation risk but their exposure depends on the supply chain operating model. It depends on the inventory of cars being bought into Singapore ahead of the sales transactions. The distributor will be unlikely to lower the selling price if the existing stock is purchased at a higher exchange rate earlier. On the other hand, the distributor may hold the price steady even if the existing stock is purchased at a lower exchange rate - this is the case for the authorized distributor without any competition from parallel importers.

3. Profits made by Authorized Distributors versus Parallel Importers
Authorized Distributors usually have a higher operating cost to provide a better service level and also incur high advertising expense to increase the branding of the mark. The pricing strategy will also be dependent on the margin target at the point of sales versus after-sales servicing. Factors to be considered are the competitors' strategy, the availability of OEM parts and skills or technology required for servicing. The going concern of a parallel importer is an important criterion since there have been many reports of non-deliveries due to financial health and fraud - do your homework first before buying from the P.I.

I don't think you can time your purchase to an advantage of currency impact since there are so many variables in the motoring market. Affordability and suitability are more important criteria. Hope this is helpful.

Lowering Cost of Ownership

Anonymous has requested for advice via comment on my earlier post Overtrade for a New Ride?

Anonymous said ...
"tks for giving your perspective. I am in the same situation as this person. current monthly mortgage is 900+, and my car is coming to its 5th year in Dec. My car paper value is at $38k. a dealer has put together a package of both rebate and overtrade such that my monthly is lower at 900 over 7 years although I still need to come up with cash of $5k. from my perspective, it seems to make sense: I pay less per month, I have a shorter loan period (7 yrs vs 10yrs currently), and I get a new car. in this instance, would you agree that its OK?"

Based on the limited information, I can attempt to give a high-level analysis on the situation.

Assumptions:
1) I will round down your current monthly instalment to $900 for ease of illustration.
2) You did not put down any downpayment for your current ride.
3) December 2008 is the changeover to the new ride.
4) The primary objective is to lower the Cost of Ownership and there are two perspectives to that too (A & B).
5) You will use the new ride up to its full useful life of 10 years.
6) Cost of Operating the Car is not included.
7) Net present value of cash or car is not computed.

A. Overall Cost of Ownership (full usable life of the Ride(s))

Current Ride only
-----------------
Total Cost = $900 x 12 x 10 = $108,000

Cost per month = $900

Current Ride + Overtrade to New Ride
------------------------------------
Total Cost = Payment on Current Ride up to December 2008 + Full cost of New Ride

Payment on Current Ride = $900 x 58 (2 months short of 5 years) = $52,200

Full cost of New Ride = $5,000 (downpayment) + $900 x 84 (7 year loan with $900 monthly instalment) = $80,600

Total Cost = $52,200 + $80,600 = $132,800

Cost per month = Total Cost / Total Useful Lifes = $132,800 / (58+120) = $746
The denominator (58+120) is the used life of current ride + useful life of the new ride.


B. Future Cost of Ownership (remaining useful life of the Rides)

Current Ride only
-----------------
Cost per month = $900
for the next 62 months

Current Ride + Overtrade to New Ride
------------------------------------
Total Cost for next 122 months = ($900x2)+$5,000+($900x84) = $82,400
Cost per month = $82,400 / 122 = $675.41

Thus, you can yield lower monthly cost with the overtrade if all the assumptions are correct. However, you should consider these factors when making your decision:

1. Is your financial health and job security in good shape to take up this deal?
2. Is the new ride at the same or better standard to your current ride?
3. Can you use your new ride to its full lifespan of 10 years? Analysis is based on full useful life.

Point 1 is key to a happier life - you will not enjoy your ride if you are constantly struggling in paying the monthly instalment and running costs (petrol, road tax, insurance, parking, maintenance, etc). Do take the time to make that decision and not get pressured by your dealer. Good luck!

Overtrade for a New Ride?

I have receive this request from LIM Y W for advice:

"Hi, need your help to understand the relationship between overtrade, cash rebates etc in determining if its useful to buy a car. My stituation is this

- have a car coming to 5 years
- outstanding loan is still around $50k in June. unlikely to get a trade in to full redemption value at normal circumstance.

hence,
- would it be useful for me to ask for an overtrade value to offset this process of selling off my old car?
- if I combine this with the cash rebate, would it make sense?
- for cash flow, I would also look at loans 7 years or above, and maybe even 100%

so far, current car is the longest I have held onto a car. looking to selling cos am keen on other models and people have said that if I want to sell, the best time is to do so before its 5th year. If I get the right car, I would look to holding onto it for more than 3 years, maybe even 5.

any advice?"

Let me first explain the Overtrade practice by dealers. It is introduced when the MAS regulation for a motor loan limit of up to 70% of the car price was in effect. A typical scenario was that the motorist wanted to trade in his old ride for a new one but the value of his old ride was not sufficient to match the downpayment.

Example:
Value of old ride = $10,000 (market value - outstanding loan balance)
Price of new ride = $70,000
Required downpayment = 30% x $70,000 = $21,000
Maximum loan amount = 70% x $70,000 = $49,000
Shortfall = $21,000 - $10,000 = $11,000

Overtrade amount = OT
In order to meet maximum 70% loan amount, 30% x (70,000 + OT) = 10,000 + OT
Solving the equation, OT = 15,715
Inflated price of new ride = $85,715
New downpayment = 30% x $85,715 = $25,715
Maximum loan amount = 70% x $85,715 = $60,000

Thus, the trade-in value for the old ride was increased to $25,715. The difference was that the buyer had to sign up a new motor loan of $60,000 instead of $49,000; no additional cash outlay was required.

Since MAS had relaxed the rule to allow for 100% loan, the Overtrade scheme has been used to help motorists with their current ride in negative equity. What is negative equity? See my post on "When is your Ride Breaking-Even?". The overtrade scheme is essentially carrying over the outstanding loan balance after deducting the market value of the old ride to the loan of the new ride. Thus, it is a cashflow tool but it burdens the borrower with a bigger loan.

What about Cash Rebate? See my post on "A Deep Dive into the Cash Rebate scheme". Cash rebate is essentially getting cash upfront for a loan with a higher interest rate; the cash is either used to lower the purchase price or returned to the buyer.

Back to Lim's request:
1. What is the objective of getting a new ride?
Lim: "am keen on getting other models"
Lim: "If I get the right car, I would look to holding it for more than 3 years, maybe even 5."

How do you define "right car"? If your criterion is fashionable model, then all cars will not be right after newer models are out. My definition of a right car is one that takes my passengers and I to our destinations safely with a reasonable known running cost.

In my opinion, it is a very expensive lifestyle to keep upgrading to a newer model every few years. It is fine if you can afford it but using the two schemes to facilitate that will create a long-term strain on your financial health.

2. When is the best time to sell your old ride?
Cars are made to last for more than 10 years and we should strive to utilize them for the full 10 years lifespan (limited by the COE expiry). You can use the "Financial Cost of Ownership Tool" to analyze the annual depreciation. Although your old ride has higher PARF rebate up to age of five years, you have to consider the rapid depreciation in the earlier years too. You can see clearly that the depreciation rate is decreasing over time i.e. you incur less to run your ride in the later years.

I can think of some good reasons to change your old ride:
a. Heavy fuel consumption, coupled by need to drive extensively for your job - consider green cars such as the hybrid or CNG model.
b. Need major parts replacement (eg. gear box).
c. Family size has outgrown current capacity.
d. Road worthiness is a concern.

Showroom cars are always appealing and you should always think carefully over the decision for a new ride. Consider the stakeholders in the motor business:
1. Government - new car sales will help to increase our budget surplus with the "income" from COE quota premium and vehicle taxes.
2. Dealers - they will go out of business if there is no car buyer.
3. Banks - they will go out of business if there is no borrower.

Don't step into a showroom and you will avoid being tempted to change your ride. Hope this helps.


Related posts: Cost of Ownership, When is your Ride Breaking-Even?, Costly Frequent Car Refresh?, Financial Cost of Ownership for Used Car