The breakeven point is one of the most overlooked factors in car financing, 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 can help you. help prevent financial problems, says Lebogang Gaoaketse, head of marketing and communications at WesBank.
When you borrow money from the bank to buy a car, a certain amount of time must pass before the amount you owe matches the trade-in value of the car. This is your breakeven point, Gaoaketse said.
“The reason it’s important to know your breakeven point is because this is when it becomes most cost-effective to trade in a new car and enter into a new financing agreement. If you trade in too early when you owe more than the car is worth, the difference will either have to be settled or included in the new financing terms.”
Converting existing debt into a new car loan is also a potentially dangerous situation, as the new car’s breakeven point is pushed even further out, Gaoaketse said.
When is break even?
Break-even points will vary from case to case and depend on various factors such as respective deal structures, financing terms and deposit amounts.
The vehicle itself is also an important part of the equation, as specific models and derivatives along with their specific depreciation rates and trade-in values will vary over 24 to 42 months, Gaoaketse said.
“In general, it takes between 45 and 49 months break even on a 72 month car loan† However, WesBank’s data shows that South African consumers tend to trade in too quickly, after only about 38 months, meaning they have between 10 and 14 terms before they break even.
“There are many factors that influence the breakeven points of the respective customers. The easiest way to break even and potentially upgrade to a newer car sooner is to make a healthy down payment up front when buying a car. The larger the deposit, the faster your break-even point will be reached. It is also possible to push your breakeven point by paying more than your minimum monthly repayment.”
On the other hand, there are ways to negatively affect your breakeven point and they should be avoided whenever possible, Gaoaketse said.
“If you start a financing agreement with no down payment, you will start to fall behind, automatically setting breakeven as far back in your loan period as possible. After that, any missed monthly payments will push breakeven further and further.”
Motorists considering balloon payment financial deals should also keep in mind that the amount outstanding in the deferred balloon debt at the end of the loan period will drastically affect the respective breakeven points, he said.
“The break-even point for a vehicle financed with a balloon payment is much further into the future than a conventional installment deal. This will exacerbate the problem of acting too quickly as an even greater amount of debt has to be settled or added to the cost of the new deal.”
Monthly installments are not the bottom line when it comes to calculating costs. Other costs such as fuel, insurance, tires, regular maintenance and unrelated living costs should also be considered, Gaoaketse said.
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