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.
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.