The breakeven point is one of the most overlooked factors in vehicle finance and can lead to potentially dangerous debt situations.
This is according to WesBank, which provided insights on breakeven points to help consumers avoid financial trouble when buying a car using a finance plan.
What is a breakeven point?
A breakeven point is the period of time that needs to pass before the amount you owe on your vehicle’s finance plan matches its trade-in value, said Lebogang Gaoaketse, Head of Marketing and Communication at WesBank.
The reason a breakeven point is important is because it indicates the most cost-effective time to trade in your current car and enter a finance agreement on a new car, he said.
The breakeven point of a car varies on a case-by-case basis, as it is reliant on the deposit and finance terms of the finance contract.
The car itself is also an important factor, as the brand and model will have an effect on the vehicle’s depreciation and trade-in value.
WesBank’s data suggests that, on average, it should take between 45-49 months to break even on a 72-month car loan.
However, WesBank said many South Africans tend to trade in their cars too soon, averaging at about 38 months, which means they often have 10 or more instalments to go.
“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,” said Gaoaketse.
“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.”
How to improve your breakeven point
The easiest way to improve your breakeven point is to pay a large deposit upfront.
“The bigger the deposit, the quicker your breakeven point is reached,” said Gaoaketse.
Additionally, it is also possible to bring your breakeven point forward by paying more than the agreed-upon monthly minimum repayment.
Gaoaketse also warned that starting a finance plan without a deposit will set your breakeven point as far back as possible.
Likewise, any missed payments will push the breakeven point further away.
Finally, a balloon payment can also drastically set back your breakeven point, said Gaoaketse.
“[A balloon payment] 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,” said Gaoaketse.
Ultimately, consumers should ideally not be paying off a portion of their old car while driving their new one, he said.
WesBank recommends financial discipline when gauging the affordability of a new car, and to remember that other costs such as fuel, insurance, and upkeep should also be factored in.