Why Owning a “Phat” ride may be nothing more than….Fat Pride!
Note: This is based on the Jamaican economy – written a few years ago but still applicable today.
If I was going for a more traditional title it would probably be: “Why you should buy only as much vehicle as you need or can afford.” Really though, who would that capture?!
Many times when we think of the valuables we buy in life the 2 most popular purchases are…drum roll, a car and a house. They however are quite different purchases altogether. When purchasing a car, I strongly believe many times we would make completely different decisions if we factored all the expenses.
It’s a no brainer most times. The bank advertises “low” interest rates, 90% financing, deals with the broker/dealership. What’s the missing piece of the puzzle?
I’ll start with this. If anyone ever told you that you purchased an asset, they lied! The fatter the ride, the more it costs.
Hate to be a bubble buster ….Really…. really do.
Let’s use Ronald as an example. He’s a young professional earning JA$ 2 Million a year and is ready to go on the hunt. He looks at 2 rides. P.S remember prices are in Jamaican Dollars in the event you think we are buying Bentleys in Jamaica.
Let’s call ride 1 Phat ride and ride 2 Utility. Phat ride is a 2010 Subaru Impreza WRX, Turbo, 4 wheel drive blah blah blah. ….JA$ 2.5 million
Utility is a 2007 Nissan Tida, ….couldn’t even give you the specs. – JA$1.3 million
The bank says “For Phat ride i‘ll give you 90% financing and for utility 70%”.
That means Ronald needs a lower deposit of JA$250 thousand for the fat ride compared to utility where he’ll need a deposit of JA$390 thousand. You heard right, the more expensive car is “easier to acquire” thus far.
Bank chips in again and says “For the fat ride I’ll give you 6 years to pay normally but you know what we can negotiate 7! However, for utility I’ll give you 4.” To top it off, for Phat ride I’ll give you a cheaper loan at 10% but sorry for utility it’s 12%! That equates to a fat ride monthly payment of JA$37,000 and for utility it’s JA$30,000.
Patrick thinks to himself, WOW!…for only 7 thousand more I get the phat ride! I can do that!
Question to ask is, is it really only JA$7,000 and is the difference worth it to me!?
Let’s look at what the real cost is that the bank is not showing you.
First: Interest
A 7 year loan means that the principal is being paid over a longer period. That equates to less principal each month and more interest over the lifespan. The interest on a larger sum despite the lower interest rate can equate to being higher than a lower sum at a higher rate.
In English: Total interest for year 1 for Phat ride at the 12% works to be JA$ 214,000 while the utility is JA$ 127,000 (using Reducing Balance). Over the total life of the loan, interest on Phat ride is JA$890 thousand while utility is JA$310 thousand.
Second: Depreciation
The more expensive the car, the higher the depreciation cost. This doesn’t impact your cash flow but when it comes to selling Phat ride you’ll surely find out. Cars depreciate by about 10% to 15% annually, so the higher the value the higher that cost. Depreciation on Phat ride in year one is approximately $250,000 vs. utility which is about $130,000.
These things are starting to add up.
Third: Keeping the ride
These days, it’s not all together fair to use petrol as a guide as the newer cars tend to be very efficient. In this case however with surety this Phat ride burns more. (I would estimate 20 miles per gallon for Phat ride, 30 mpg for utility). If Ronald spends $4000 on gas per week with the utility he’s probably spending about $6,000 in the Phat ride. I do believe I’m being conservative.
Monthly that’s a difference of JA$8,000. Annually that’s a difference of JA$96,000 and over 7 years well….you do the math….
Because I’ve already proven my point, I won’t even get into the parts difference and maintenance for the ride.
Summary
So let’s summarize what this “JA$7 thousand slightly more” monthly payment really represents. Over the lifespan of the loan the difference is almost JA$ 2 million and in truth, in the early years the actual monthly cost is approximately JA$25 thousand more. I’ll get pretty formal now and say “Please see table below” for explanation (Click to enlarge).
Looking at the annual cost-to-keep, the difference in the earlier years is as high as JA$ 300k
If you say “I’ll sell in like …4 years”, you’ll see the real difference in expense is almost JA$1.2 million.
If we look at the combination of principal and the cost-to -keep, the true difference is nowhere near “only JA$ 7 thousand.”
When purchasing your ride, always assess what you really are fattening here. If you value Phat enough and you believe you can afford it, by all means go ahead. My take is to always assess the situation and buy as much car as you need (or can afford). The difference between what you need and what you may desire is way more than the bank cares for you to know (not JA$7,000).
June 26, 2013
Steven Livingston
So let’s summarize what this “JA$7 thousand slightly more” monthly payment really represents. Over the lifespan of the loan the difference is almost JA$ 2 million and in truth, in the early years the actual monthly cost is approximately JA$25 thousand more. I’ll get pretty formal now and say “Please see table below” for explanation.