Make sure you know what you’re vehicle’s breakeven point is before you trade in

While most people would love to buy a car with cold-hard cash and not accrue any debt, vehicle financing from the bank presents the other affordable method. Depending on various factors like occupation, preference, or model derivatives, many people trade in their vehicles long before it is fully paid.

A 72-month car loan should take between 45 and 49 months to pay off. However, according to WesBank data, South African consumers tend to trade in too soon, after only about 38 months. This means that they have between 10 and 14 instalments to go before the break even point is reached and could lead to financial trouble.

Break even point? Maybe you’ve heard the term before and didn’t know exactly what it meant. While it is entirely possible to upgrade your car every few years, the breakeven point is described as or reached when the trade-in value of the financed vehicle equals the amount still owed to the bank.

Vehicles from automakers like Toyota, Hyundai, and Volkswagen have some of the highest resale values in South Africa and are often in demand. The simplest way to reach the break even point and potentially upgrade to a newer car sooner is to pay a substantial deposit when purchasing a vehicle. The larger the deposit, the faster you will reach your breakeven point.

A possible downside is starting a finance agreement with zero deposit, which then automatically sets your breakeven point as far back into your loan period as possible. In addition, any missed monthly payments will have a similar effect.

The leaves the consumer with either settling the existing vehicle and then refinancing for another one, or trade it in altogether and have nothing. Owning a car has become a necessity in South Africa due to a number of factors, so the former is the route often followed.

If you’re fairly new to the world of vehicle finance, Gumtree lists some of the commonly used terms:

Balloon payment – A balloon payment is a lump sum that must be paid at the end of a vehicle finance term. It can also significantly reduce monthly payments for the buyer. A positive is that it can free up short-term cash, though in the long run money has to be saved up in order to pay the lump sum at the end of their repayment period.

Hire purchase – Also just a fancy phrase for vehicle instalment, it is the most commonly used method of vehicle purchase whereby the buyer and bank enter into a contractual agreement. It allows the buyer to purchase a vehicle via monthly repayment options that typically ranges from 12 months to 72 months.

Interest – Your interest rate is the percentage of your principal that you’ll pay to borrow that amount from a lender. It is the cost of borrowing money and where a percentage of the capital amount that needs to be paid back to the bank – usually the first 12 months of the contract.

Settlement amount – This is the amount or physical letter that provides you, the customer, a quote for the amount you need to pay in order to settle your vehicle finance account in full.

Now that you’ve got the knowledge, it’s time to shop! Head to gumtree.co.za or your Gumtree app (click for Apple & Android) and don’t forget to use your location settings to find local service information close to home.

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