Ryan says: I am considering buying a new car. I owe roughly R35 000 on my current vehicle. What are my options if I want to get something new?
Do I need another cash deposit or do I sell the car then settle my current finance and hope for 100% financing?
What are the benefits of a trade-in? I have heard talk of book value, but light research shows that the amount being offered by dealers for a trade-in is less than the car is worth.
Maya replies: Your age band was interesting in relation to the question — it shows that you are between the ages of 26 and 35.
Car debt is one of the main reasons people under 35 do not save sufficiently. There is always the temptation to use the extra cash you receive from salary increases or promotions to upgrade your car.
The problem is that cars are a depreciating asset (you will see that as soon as you try to sell it), so spending money on a car actually makes your asset poorer while putting money into a long-term investment grows your asset base.
The real question is, do you need a new car? Why do you not finish paying it off and hold on to it until you have built up a deposit on a new car?
Possibly you bought the car with a residual or “balloon” payment and you are now in a situation where you have to sell the car to settle this debt (see related articles on balloon payments).
You would be able to re-finance the residual payment — this could be a good option if you are able to settle the debt over a year. You would then have a car that is fully paid off, gets you from A to B and allows you to save the amount you were paying on instalments.
If the R35 000 is part of your normal financing period, apply the same logic — pay it off as quickly as possible.
Deposit
To get back to your question, I am not sure what your car is worth compared to what you owe on it.
If you are only able to settle the debt then you will most likely need to find the money to put down a deposit on a new car. When buying a new car make sure you do not opt for a residual so you are not in a position where you have to sell the car to settle the amount — often for less than you still owe.
Residuals are encouraged by motor dealers to get you to spend more than you can afford by lowering the monthly repayments — but hitting you hard at the end of the period.
Trade-in
You say your trade-in is less than the car is worth, but a car is only worth what you can sell it for — not what the book says it is worth.
That said, dealers do put a mark-up on when they resell your car, so you may be able to get a bit more if you sell privately.
You can try to sell it privately through something like AutoTrader, but make sure you have all the paperwork organised, meet the person at the licensing office to hand over the car and make sure ownership transfer takes place — there are a lot of conmen out there (see related articles on buying a second hand car).
You can use AA Autobay to sell your car, which would be a safer option.
My bottom line recommendation is to hold on to the car, become debt free and start investing in growth assets, not depreciating ones. And always buy a second-hand car — on average a car depreciates by 25% in the first year, so you can save yourself 25% or more on your dream car.
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