Ask any man on the street when is a good time to trade-in their car and they would probably answer, "after two or three years max".
Bruce Whitfield of The Money Show thinks this is "motoring industry propaganda" and asked an economist, Mike Schussler, if he thought there was any financial logic to selling or trading in your car.
"There is no obvious equation for when there is a best time to sell a car."
Work Out The 'Utility Value' Of The Car
In the first three years, a car will depreciate rapidly. This is proven by StatsSA, who shows a negative car price year-on-year.
According to the Automobile Association (AA), a new car loses around 40% of its value by the end of year one, and 60% by the end of the third year.
While some think it may have something to do with the
number of kilometres on the clock, the age of the car, or even the fact that it's cheaper if you pay with cash, Schussler believes this is misleading and consumers should rather look at the 'utility value' of the car instead.
The utility value is the use you get out of the car. For example, the fact that it takes you to work and back, the kids to school, and pretty much wherever you want to go. One tipping point, that could sway your decision, is the increasing expense to maintain and replace parts in a car. Especially where replacement parts may equal more than the true value of the car.
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Think Before You Trade-In For a Newer Model
Schussler also speaks about how people trade in their vehicles every two to three years for a 'newer model'. But, is the 'newer model' enough for you to take on that unnecessary expense all over again? For example, as soon as you finish paying off one vehicle, you immediately begin paying off another.
He adds, "So why would you want to take on that unnecessary expenditure, apart from the fact that it was pleasing you aesthetically or enhancing your ego?"
Consider The Right Time To Trade-In Or Buy The Newer Model
Schussler says he drives his cars for as long as he can. He also recommends only trading in if the upgrade model is significantly different to your current car.
Often the upgrade model is only 'half an upgrade' of the car you already have. Whereby your car has half the features of the new car, apart from a spare few.
Schussler says you have to work out what the utility value of the car is and whether or not that utility value is going to be higher than the value of the car.
The economist advised that what motorists want to optimise is the difference between the original price of the purchased car and the subsequent trade-in value.
Consumers must remember that when you buy a new car, it loses 14% of the price and 20% when you drive it out of the showroom.
The Financial Logic Of Owning a Car
At the end of the day, it is clear that a car is a financial liability. As mentioned, it depreciates pretty steadily from the moment you drive it off the showroom floor. What a car also is, is a utility that we rely on to conduct daily necessities. These include going to work, taking the kids to school, and purchasing food and other necessities.
"Buy a reliable car that is fuel-efficient and drive it until the wheels come off."
Listen to the full interview below: