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
