Breakeven Points: Trading down for lower car repayments could cost more in the long run


Many South African motorists who are feeling the burden of inflation, soaring fuel prices, the recent repo rate hike and last year’s VAT increase are now considering moving into more cost-effective cars.

Image Supplied by WesBank

A simple switch from an expensive gas guzzler to an affordable runabout might seem like a wise move, but the transition alone can be costly and there’s certainly an optimum time to trade in a car that motorists should bear in mind.

Lower monthly repayments and fuel bills will ease the pressure on household finances, but motorists should keep in mind that significant losses can be made by trading a car at the wrong time. The best time to trade in a vehicle is when the trade value is in line with the settlement amount owed to the bank it’s financed with. This is called the breakeven point, and trading in before this time could see a consumer paying in just to get out of the finance contract. In other words, if your car’s trade in value is R200 000 but you owe the bank R250 000, you’ll be required to come up with R50 000 just to make a move into a more affordable car.

“Vehicles, especially those which are less than a year and half old, often depreciate at a faster rate than their owners have made payments on the loan,”

says Ghana Msibi, WesBank Executive Head of Sales and Marketing. 

“For many consumers this could mean it’s cheaper, in the long run, to wait until a later stage to trade in.”

WesBank’s data shows the majority of vehicle finance contracts are in place for six years or 72 months. In these cases, a breakeven point would normally arrive at between 24 and 36 months, depending on the size of the deposit at time of sale.

The breakeven point in an ownership cycle varies on a case-by-case basis and is affected by factors such as missed payments, extra payments, the size of a deposit and depreciation of respective vehicles. It’s possible to bring the breakeven point forward by putting down larger deposits and financing over shorter loan periods.

The new vehicle market in South Africa is extremely competitive and many manufacturers offer incentives to help buyers settle outstanding balances. These trade in assistance programs can make up for some shortfall for motorists who have not quite reached their breakeven point, essentially buying them some time in the ownership cycle.

The country’s underperforming economy, however, means manufacturers are spending less on these marketing schemes so it’s worthwhile to shop around in order to find the best deals. Patience is key in any car buying journey – whether it’s trading up or down, or for first-time car buyers.

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