Vehicle finance company Wesbank notes that amid a raft of increases coming from all directions in 2016, consumers might have started thinking of selling their existing car to move into something more affordable.
The financial services company said that consumers who have purchased a car within the last 18 months might find that depreciation has made it difficult to trade in and buy a more affordable car.
“The optimal time to trade in one’s car is when the trade value for the car is more or less in line with the settlement amount owed to the bank. Trading in a car before this breakeven point could result in the client having to pay in on their finance contract, as the vehicle has depreciated faster than they have made payments on the loan,” Wesbank said.
Currently the vast majority of vehicle finance applications are done over 72 months or six years. The demand for balloon payments is also on the rise – meaning a breakeven point will be reached later in the car ownership cycle.
Wesbank noted that when customers sign a vehicle finance agreement for 72 months, their breakeven point only arrives at between 48 and 52 months into the contract.
However, many consumers choose to trade in their car before this point – WesBank’s data shows that, on average, buyers trade in at month 38, meaning that most consumers trade in their cars between 10 and 14 instalments before they reach a breakeven point.
Mike Schussler, chief economist at economist.co.za has advised that consumers keep their vehicles for as long as possible for the obvious reason that its value depreciates the minute you drive it off the showroom floor – and quickest in the first year.
“Why would you want to buy another car so soon except to boost your ego,” he said.
According to the Automobile Association (AA), a new car loses value as soon as you drive off the forecourt and by the end of the first year will have lost around 40% of its value.
If you do 10,000 miles (16,000 kms) a year, the average car will have lost around 60% of its value by the end of its third year, the AA said.
It is widely reported that most cars depreciate at a rate of 15% – 20% per year, and by year five, your vehicle will generally be worth half what you originally paid for it.