A successful salesman takes out an auto loan to get the car he always wanted.

Eddie* is a salesman, not married and in his early 30s, whose ambition had always been to buy a luxury car. Times were good and he was raking in an average of about $6,000 a month including commissions as a paper salesman. So, he took the plunge and ordered a luxury car when he received his commission payout.

The day Eddie picked up his car was the proudest moment in his life, even though he had to take a loan of 90% of his car value, with monthly instalments of $1,600 for a seven-year period. He felt sure he could cover his monthly payments because at the time of his purchase, the Singapore economy was bubbling and paper sales were going very well.

But within a year of his purchase, Singapore’s economy had taken a turn for the worse and the paper business started to get bad. His car had suddenly become an expensive possession that was causing him big headaches.

What should he do?

After the downturn came, Eddie found that he was not earning much more than his basic salary of $3,000 a month.

After CPF contributions, his take-home pay was about $2,400. As such, monthly payments on his car took up about 67% of his total income, even before factoring in other car-related charges like insurance, road tax and ERP rates.

He had no choice but to sell his beloved car.

However, because he took a car loan of 90%, he found that he was in negative equity – that is, the amount he had to pay off on his car loan was more than the amount for which he could sell his car.

As a result, he had to settle the difference with money from his savings when he eventually sold his car. Luckily, Eddie had enough savings to cover the difference.

Although he had lost his beloved car, Eddie’s quick decision to sell off his car helped him escape even worse debt problems as the global financial crisis escalated. If he had waited longer to sell his car, his savings may not have been enough to cover his loan difference because the selling price of his car would have fallen further, and he would have also had to continue paying for the upkeep of the car.

* Names are fictitious