Trading in? We need to talk about a break-even point
By Lebogang Gaoaketse
Head of Marketing and Communication at WesBank.
A show of hands please… how many of you have financed a car and traded it in for a new one without understanding what a breakeven point is?
The breakeven point is one of the most commonly overlooked factors in vehicle finance, and while it’s entirely possible to upgrade your car every few years without ever knowing the meaning of the term, a basic understanding of the concept could help you avoid financial trouble.
It’s very simple really. When you borrow money from the bank to buy a car, there’s a certain period of time that needs to pass before the amount you owe matches the trade-in value of the car. This is your breakeven point.
The reason it’s important to know your breakeven point is because this is the time when it becomes most cost-effective to trade in and enter a new finance agreement on a new car. If you trade in too soon when you owe more than the car is worth, the difference will either need to be settled or rolled into the new finance terms. Rolling existing debt into a new car loan is a potentially dangerous situation, as it will push the breakeven point of the new car even further out.
Breakeven points will differ on a case-by-case basis and are reliant on various factors such as respective deal structures, finance terms and deposit amounts. The vehicle itself is also an important part of the equation, as specific models and derivatives together with their specific depreciation rates and trade-in values over 24 to 42 months will vary.
In general, it should take between 45 and 49 months to break even on a 72-month car loan. WesBank’s data shows, however, that South African consumers tend to trade in too soon, after only around 38 months, meaning they have between 10 and 14 instalments to go before breaking even.
There are many factors which influence respective customers’ breakeven points. The easiest way to reach breakeven and potentially upgrade to a newer car sooner is to pay a healthy deposit upfront when buying a car. The bigger the deposit, the quicker your breakeven point is reached. It’s also possible to bring your breakeven point forward by paying more than your minimum monthly repayment.
There are, on the other hand, ways to negatively impact your breakeven point and these should be avoided where possible. Starting a finance agreement with zero deposit will start you off on the back foot with breakeven automatically set as far back into your loan period as possible. Then, any missed monthly payments will continue to push breakeven further and further away.
Motorists considering finance deals with balloon payments should also bear in mind that the amount outstanding in the deferred balloon debt at the end of the loan period will drastically affect respective breakeven points.
The breakeven point on a vehicle financed with a balloon payment is much further into the future than it would be with a conventional instalment deal. This will compound the issue of trading in too soon, as an even larger amount of debt will either need to be settled or added to the cost of the new deal.
It’s not the most ideal situation to be paying off a portion of your old car while driving your new one. This can be avoided with a solid understanding of breakeven points, and by applying the correct financial discipline when gauging affordability.
Remember, monthly instalments are not the bottom line when it comes to calculating expenses. Other costs such as fuel, insurance, tyres, regular upkeep and unrelated living expenses also need to be considered.