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When a car becomes a debt trap

Jun 17, 2015

If you can no longer afford your car, it’s time to take action. Here are your options.

car debt trapLucky wrote to me to find out whether or not he should sell his BMW for a loss as the cost of the car is having serious consequences on his other financial commitments. Lucky’s story is similar to that of many readers who have written in to me recently because they simply cannot afford to keep their car on the road.

“I need to sort my finances out and I can’t keep up with the repayments. I am also worried that I may start to fall behind on payments,” says Lucky who two years ago, on the back of a salary increase, decided to buy a BMW 316 sport for R400 000.

If Lucky had followed the basic rules of car finance, which is that you should never finance a car for more than 60 months and never take a residual, his monthly repayments would have been R9 235.

Lucky would have realised very quickly that he couldn’t afford the car on his monthly salary. But captive car finance schemes – BMW Finance in this case – have a vested interest in getting you to spend as much as possible on the car and it’s not difficult to convince a customer, who really wants to drive the car of their dreams, to agree.

So they offer finance deals over extended periods with high residuals that appear to be “affordable” but which really lead to over-indebted car owners who either have to auction off the car to settle the debt or who suddenly find themselves a “BMW” client for life as they are forced to trade-in for a new car when they cannot pay the residual.

In Lucky’s case his car was financed over 72 months with a 15% residual. This reduced his monthly repayments to R7 600. Although it was a stretch, Lucky could just afford the repayments.

At this rate Lucky would be paying off his car for the next six years costing R607 000 in total.

If, like two-thirds of people who opt for a residual, he cannot not come up with the R60 000 residual payment at the end of the period, he would have to re-finance this amount for a further three years or trade in the car and get locked into another expensive car re-payment plan.

Even if Lucky understood and was prepared to accept the real cost of the loan, like many first-time car owners he was not fully aware of the running costs of a car. Lucky had not factored in that his expensive car with its big engine would cost him R2 500 per month in insurance and R1 300 in petrol. That means Lucky’s car is now costing him R11 400 – that is more than half of his take-home pay. This is a very expensive way to get to work each day!

The catch

Lucky clearly cannot afford to keep owning this car, but here comes the catch: he cannot sell the car for anywhere near what he owes on it.

This is the other problem with extended payment periods: your car depreciates at a far faster rate than the amount you are repaying. The longer your repayment period, the longer it takes to reach break-even point – where you can sell your car for what you owe.

  • On a 48-month (four-year) repayment plan the average car would break even at around 28 months – just over two years. Lucky would be able to settle his debt fully by now.
  • On a 60-month contract (5-years) the breakeven point is around 42 months (nearly four years)
  • On a 72-month contract the break-even is 54 months – that means you owe more on your car than it is worth for nearly the first five years!

In Lucky’s case, although he has been paying for the car for two years, he still owes around R390 000 and would only receive around R300 000 in a private sale. Lucky would need to finance the remaining R90 000 through a personal loan.

Should he sell?

If Lucky sold the car and purchased a second-hand, entry-level, 1.4L engine-car for R100 000, this is how his finances would stack up:

R90 0000 three-year personal loan to settle BMW shortfall: R3 200 per month
R100 000 car finance over four years: R2 782 per month
Insurance on smaller car: R800 per month
Petrol for 1 000 km per month: R780 per month
Total: R7 562 per month

Lucky would be saving a massive R3 800 per month by selling the BMW and be debt free within four years. If he invested just R2 000 of this saving per month in an investment account earning 10% pa, he would have R117 000 in four years – enough to buy another car with cash or to put down a substantial deposit.

It’s worth noting that this option is only available to Lucky because he has not yet fallen into arrears and so his credit record is not impaired. If he had fallen behind in payments it would be more difficult to get a personal loan or to purchase another car.

Cost of keeping your car on the road

Wesbank did some research into the increasing costs of keeping your car on the road. The figures explain why so many people are struggling to afford their cars. The reality is that today, given the high costs of fuel, running costs could be higher than your monthly instalment.

The research looked at the total cost of owning an entry-level car in 2007 compared to 2015, taking inflation into account. The actual instalments would be around R450 more each month. The cost of petrol would have increased by R1 000 a month, insurance an extra R500 per month and maintenance around R115 more a month.

In 2007 an entry-level car would have cost you R4 300 per month, of which 53% would have been the repayments. Today, adjusted for inflation, an entry-level car would cost over R6 200 to keep on the road but the instalment would only be 45% of the total cost.

Wesbank car research

This article originally appeared in City Press


  1. hi Maya

    i took a car finance last month. it is a hyundai motion 1.4 auto at R307K over 72 months at 6.09% with a massive 40% residual. what i want to know is:

    when will it break even or when will the value of the car be the equivalent of the residual?

    also if i wanted to finish paying the principal debt in 48 month how much would i need to add to the repayment installment

    • It depends on the depreciation of the vehicle and resale price. Realistically it would probably only break even in about year four or even five. You need to speak to the car financer to discuss how to pay it off in a specific time period. You can opt to shorten the contract

  2. I took an personal loan from Capitec to pay off the car Renault Clio 2016 model last year November so now I was thinking of trading in to Renault Captur so my question how does the bank do this? Does the bank pay off the personal loan in order for me to only pay for the car finance after trading in the car? Please explain I need clarity to this thank you in advance.

    • personal loan is not car finance so Capitec does not have your car papers. You would have to pay off the personal loan separately.

  3. I bought a house 220km return away from work. I am driving Jeep compass 2. 0 which I bought it 2 years ago on 72 months repayment on 20%balloon, I want to trade in for a lighter vehicle in fuel economy for me to travel every day, the dealership told me that they can trade in my car for R150000 and I am still owing the bank MFC R229000 settlement which leaves R80000 shortfall and the small car is 2019 Polo 1.0 for R190000 and they can’t load it on the polo what can I do?

    • Unfortunately you are caught in a classic car finance trap of a 72 month repayment with a balloon. Basically your car will be worth less than you owe on it for about 5 years! If you want to downsize, the only option would be to take out a personal loan for the shortfall. That may seem like a crazy idea but do the maths – work out how much you will be saving in petrol AND insurance. It may work out that downsizing, paying off the personal loan over two years will still save you money.


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Maya Fisher-French author of Money Questions Answered

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