Are the rich getting richer and the poor getting poorer?

Purchasing a new car today can be costly in the long term no matter how you slice it. Assuming no down payment, a $30,000 loan for a new car over 5 years at a 6% interest rate will result in interest totaling nearly $4,800. This means that a car whose sticker price may be $30,000, realistically ends up costing the consumer $34,800 over 5 years or $580 a month. Thats without even considering licensing, insurance, gas and maintenance.

At the end of those 5 years, that owner may be able to sell that car. Lets assume they can manage to get $10,000. That $10,000 can then be used to be put towards savings or offsetting the cost of a new car. Assuming that new car is still a $30,000 one, that would be a loan of $20,000, with nearly $3,200 in interest, costing the consumer $23,200 over 5 years, or payments of $386 a month.

Under the present system, an individual could have a new car every 5 years for an initial 5 year term of $580 a month and recurring terms for $386 a month. Conversely, if this used car ban goes into effect, that same individual would have to purchase that $30,000 car for 10 years, which results in monthly payments of $333 a month, total interest of nearly $10,000 and a total price of $40,000.

For those individuals who are able to purchase that used car today, they may only have $1,000 for a down payment and get a loan for $9,000. At that same 6% interest rate would result in interest of nearly $1,440. Thus the car would end up costing $11,440 over 5 years, or $174 monthly. Assuming it held no final value, that individual would then buy another used car, costing $22,880 overall for the 10 years for 2 used cars.

What happens when those individuals who have been purchasing used cars are now forced to purchase new cars? Well according to the calculations above, their monthly car payments would rise from $174 per month to $333 or more. This creates an added $159 monthly strain on the checkbooks of less wealthy Bermudians.

It will be difficult to convince many Bermudians to give up their cars given the alternatives, so what happens when our economy is hit with a $1,900 yearly cost of living increase for many in the low to middle income earning bracket?

In the $30,000 a year bracket, thats a 6% increase in cost of living. For those at $40,000 a year, thats a 4% increase in cost of living. Those at $50,000, $60,000 and $70,000 respectively. 3.8%, 3.2% and 2.7% increases. The result? The poor likely will get poorer with this policy.

An increase in the cost of living of those in the middle class means they cut out luxuries to cover rising cost. Perhaps it’s fewer morning coffees, less regular haircuts, fewer nights out, cutting their own grass, cleaning their own house, or worse, less savings for retirement and hard times. Futher, many of these luxuries are services that provide jobs for lower income earners, those heaviest hit by the cost of living increase. This will mean some may lose their jobs or have their hours cut back, thus being unable to meet their own increases in their cost of living, causing them to default on their loans and spiral deeper into poverty.

Will the ban on used cars spell danger for our economy in the long term?  Will the rich get richer and the poor get poorer?  Will banning used cars be a good idea?  Time certainly shall tell.

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