Newsletter Articles

Motor Vehicle Finance - don't get caught out

At 6-Point Finance we go to great lengths to emphasise the importance of structuring your loans appropriate to your circumstances and the asset you are funding. An area where people often get caught out is motor vehicle finance.

For example, when people go to replace their current vehicle with a new one, they are often shocked to find that the best trade in offer is several thousand dollars short of the payout figure on the loan obtained to buy their existing car. This is known as ‘negative equity’. Negative equities usually occur for the following reasons;

• You structured your loan with a residual value that was too high;

• You haven’t kept the car long enough to allow the loan balance to reduce in line with care value (this usually takes two years to reach ‘break even’)

• You bought a model of car that traditionally doesn’t hold good value;

• You paid too much for the car initially; or

• The car has done high kilometres or hasn’t been well maintained

A five (5) year term with 30% residual is one of the most common loans for a good quality car. Although you may think these terms would pass all of the above tests, the second hand car market as not what it used to be. Manufacturers have been fiercely competing for business and margins on new cars have been dropping. In addition, there are now a number of car models priced at $20k - $30k for a brand new car and they often represent a more attractive proposition to purchasers than paying similar money for a used car. As demand for used cars has dropped so too has trade-in values.

It is important to ensure your finance is well structured and perhaps more conservative than in the past. For example you may opt for a 5 year term with 20% residual. It might be more beneficial in the long run to pay a little extra each month during the loan term than have to find thousands of dollars to cover the shortfall at the end of the term.