The next six months could be a good time to trade in your car for a new model, because dealers are expected to make attractive offers to bring in more buyers.
However, the potential to receive a higher price is not in itself a good reason to trade in your car. You should aim to pay off your current car as soon as possible and then save towards a deposit on a new car. The bigger the deposit, the smaller your repayments and interest costs.
Marcel de Klerk, Absa Vehicle and Asset Finance's managing executive, says there is big demand for used cars, and prices are expected to start rising. This means you are likely to receive a higher trade-in value than previously if your car is one to three years old.
According to the National Association of Automobile Manufacturers of South Africa, the sale of new passenger vehicles was 3.48 percent higher in July than in June.
De Klerk says the rise is probably due to more working days in July in which to sell cars. "There are also more fleet sales between July and November," he says.
De Klerk says the fact that an average of 960 cars were sold each working day during June and July is a good sign, and he doubts the market will get worse.
However, De Klerk cautions that the market is expected to show a real recovery only from about March next year.
Sales in January and February are usually not high, because of school holidays and the fact that most people are cash-strapped after the holidays.
Bank data show that owners of new cars are holding on to their vehicles for an average of 39 months (an increase of more than 10 percent from last year). This means that although interest rates have dropped, people are still not changing their cars as quickly as before.
De Klerk says one of the reasons for this is that after the National Credit Act was introduced in June 2007, it became legal for car hire purchase deals to private consumers to exceed a term of 54 months.
What you should consider before you buy a car
De Klerk has the following advice if you are considering buying a new car:
- Put down a minimum deposit of 10 percent.
- Don't sign a hire purchase contract for a period of longer than 60 months. If you are tempted to do so in order to reduce the monthly repayments, it is likely that you cannot afford the car.
- Factor in the cost of insurance. Phone your insurer and ask for a quote to get an idea what your premiums will be on a particular model.
- Your car repayments should not be more than about 25 percent of your gross monthly income.
- Be very wary of deals that include a residual amount. Ideally, your repayment terms should not include a residual amount.
A residual deal refers to a finance agreement that includes a balloon payment, or residual value, which you must pay at the end of the finance term. The residual value can be relatively large compared with your monthly instalments.
When the finance term ends, you have two options: you can either sell the car and hope that the selling price will be enough to cover the residual value, or you can ask the bank to grant you further finance for the residual amount.
If you sign up for a residual deal, it should not be done to reduce the monthly repayments to 25 percent of your gross monthly income - this is the first indication that your affordability is stretched.
Ask the dealer to tell you what the expected market value of the car will be after 60 months - this information is available in the Mead & McGrouther blue book. You should only accept a residual amount that is well below the expected market value.
Typically, if you are going for a 60-month deal with a residual, the residual value should not be higher than 30 percent of the original price.