Learn about the equity sweet spot
Keep that new car smell
So, you’ve taken the wheel of your new car. You love how it hugs the road, all the new tech and, of course, that new car smell. If only you could make this feeling last.
Well, you can.
The equity sweet spot
As every car owner knows, new cars instantly lose value when they’re driven out of the dealership. A car’s value then continues to decline over time, but usually at a slower, more stable rate.
If you have a car loan, each repayment you make builds equity in your car. As most car loans have a five year term, by the time you’re three or four years post-purchase, you’ll reach a ‘sweet spot’ where the resale value of your car may be greater than the balance left on your loan. In financial terms, this is called being in ‘equity’. If you chose to sell at this point, you may be able to pay out the rest of your loan and if there’s any equity left over, you could put it towards the deposit on a new car.
But, won’t my repayments increase?
That’s up to you. Do you want to upgrade, or update?
If you choose to update your car with an equivalent model, your repayments could remain similar. If you upgrade to a more expensive model, however, your repayments will likely increase.
Each repayment you make builds equity in your car.
That said, you should always consider your personal financial situation and the total cost of car ownership when deciding to keep, update or upgrade your car. Slightly higher loan repayments for an updated or upgraded model may be offset by lower maintenance costs, free servicing and better fuel efficiency, for example.
Remember that older cars usually cost more to maintain than new ones. And, as new car warranties expire anytime from three to seven years after purchase, you may be left to cover the full maintenance costs of your aging car.
Do your homework
Of course, it’s important to know your budget and financing options before buying a new car. With a little homework, you can enjoy that new car smell every few years – at little or no extra cost.
Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Information in this article is correct as of the date of publication and is subject to change.