Felicity Duncan
2 minute read
4 Jun 2014
6:00 am

An investor’s eye on a replacement car purchase

Felicity Duncan

I received an e-mail from a brilliant young chap called Thomas King who’s trying to make his mind up scientifically about buying a car, and whether or not he should buy new or used.

Picture Thinkstock

He did an excellent job of breaking down the costs, and came out in favour of the used vehicle. Let’s take a look at his breakdown.

First, imagine two eager would-be car owners, Warren and Carlos, each with R50 000 in cash and a need for speed.

But while Carlos is eyeing a new car, for R120 000 (which would mean borrowing R70 000, which the bank is happy to lend him), Warren is considering a reliable used car for R50 000. At the end of five years, who is better off?

 1.      Cost of the car

Carlos pays R120 000; Warren pays R50 000 and we’re off. Because Carlos borrows R70 000 to buy his car, he actually ends up paying an extra R40,445 in interest and admin fees (using Wesbank’s online calculator).

 2.      Insurance

Naturally, the insurance on the fancy ride will be more than on Warren’s skadonk, about R450 a month. Carlos would be paying about R750 a month, and Warren, about R300, with a 7% annual increase. On these assumptions, Carlos is paying R51756.66 over five years, and Warren R20,702.66.

3.      Petrol

Assuming both guys travel the same distance, say 620km a month, Carlos is probably going to win. His car is more fuel efficient -15kms/litre, or R588 a month (petrol at R14). Warren is only getting 11kms/litre, so he’s paying R789 a month. Naturally, this escalates over time, say 7% a year. Here, Carlos will pay R40 577.21 over five years; Warren, R54 448.

 4.   Services and maintenance

While Carlos’ new car is covered by a 5-year maintenance plan, Warren is paying cash. Let’s assume Warren bought something sensible and in good condition, and spends about R2 000 a year on maintenance, escalating at 7% per annum.

5.      Depreciation

Let’s assume the car loses 10% of its value every year, that would mean that at the end of the 5th year, Carlos’ car would be worth R70 858.80, and Warren’s would be worth R29 524.50.

Carlos ends up spending R181 920.07 on his car over the five years, while Warren spends R107 127.64.

But the story doesn’t end there, and the brilliant thing about young Thomas King is he realised this. Warren is going to have spare cash laying around, an extra R74 792.43. Say he invests it every month, at 12% a year, then he would earn R295 747. After five years Carlos would be out R181 920.07, while Warren would be in the black to the tune of R188 619.36.

King (26) drives the car he was sent to university with, but is considering another. He’s an environmental consultant and says value is hard to find on the JSE right now.