Best age to sell or trade your car in

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Mike Wills: Last night on the show we're talking about balloon payments on cars and how they basically weren't a good thing unless you went in with eyes wide open, knew exactly what the balloon payment was, could work on a safe assumption you are going to get an increase in your salary over the period of the arrangement and you'd either be able to afford that balloon payment, or you were happy to roll it into the same brand as some kind of buyback, or that you knew exactly what you were doing. But in that process someone called the show and said, 'Well what we do want is... they're good things because they encourage people to upgrade their cars and we get lots more new cars on the road and that makes the roads safer and people should be upgrading their cars every three years.

Mike Wills: Now, my instinct is that, that is motoring industry propaganda. That there is absolutely no necessity to upgrade a car every three years. Certainly in terms of cars' performances these days. They're good, they got longevity, you can drive the thing to 20 years quite happily. But is there a financial logic to it? Is there a calculation, equation or algorithm that says over X number of years with the value you might get back on the car plus tax implications plus, plus, plus... Can we put a number on this? If you can - 011 883 0702; 021 446 0567. Or SMS me - 31702 or 31567.

Mike Wills: Jim in Brooklyn in Cape Town. Uhm, not Jim in Brooklyn in Cape Town. Someone in Joburg. Peter says I have an algorithm that I developed to assist dealers to correctly value trade-ins. It works well and requires only a few inputs to calculate. That's the value of the trade in. But is that the same thing as what is the optimal time to sell? Mike Schussler, very well-known economist. Chief economist at economist.co.za. We normally talk about more weighty matters, Mike, but I think this matters to a lot of people.

Mike Schussler: It probably does, Mike. I am not sure if I am the right person to answer. I keep my car for as long as I can.

Mike Wills: So do I!

Mike Schussler: Well, I think car prices depreciate. They depreciate quickest in the first year, uhm, when its new and that falls very rapidly after that in the first year and then it still falls. And what is very interesting is that Stats SA, for example, gets a negative car price, uhm, second-hand car price year-on-year virtually most of the time and they only use the first three years of cars. So that gives you a pretty good idea that, you know, in the first three years the car is depreciating very, very rapidly and you've got to work out what your sort of utility value of that car is. And that utility value at one stage or another is going to be probably higher than the value of the car.

Mike Wills: What do you mean by utility, what do you mean by...

Mike Schussler: Sorry, Mike?

Mike Wills: What do you mean by utility value?

Mike Wills: Well, it gets you to work, it gets your kids to school, uhm, you know and, yes, there is going to be a certain time when the, uhm, there is going to be an increase in the cost of keeping the car. I don't know what the magic number is, but I doubt it's three years. I think if you look at most people are paying off a car over five or six years. Balloon payments we can talk about just now, but in that process you paid off a car, or to the extent have paid off a car. Then you want to go immediately and buy another car. You've taken the big hit upfront. Quite frankly I dont think that's the wisest decision one can make.

Mike Wills: I'm trying to think of what we would, what we would put into our computer equation here. Obviously you do have the car value, you obviously have a service plan which might be built into your payments and then after a certain point you're going to have to pay for that. I assume cars get more expensive to maintain as they get older. They might be less fuel efficient than a new one. There'd be quite a bit of stuff you'd have to put in there but, like you, I can't believe it would spit out a number that says turn it over every three years, but thats what the industry often tell us.

Mike Schussler: Well, I think that's to keep car sales going on one side.

Mike Schussler: The other thing is I just want to say is, you know, the fuel improvements on cars has been stunning, but then you've got to look at it over decades, not a three year period. You normally get model upgrades every seven or eight years. I think that gives you a fair idea when you sort of want to go and keep a car is when it, sort of, gets to a model upgrade, and a decent model upgrade, sometimes takes even longer because sometimes it's just sort of half an upgrade if I can call it that. So, why would you want to buy another car that's got similar features to your car? It doesn't really improve the fuel efficiency other than, you know, your... pleasing you aesthetically, or your ego.

Mike Wills: Mike, thank you very much. I know there is a lot more you can talk about but I think you confirm what I think that there is no necessary obvious equation that would lead you to the conclusion that every three years is a good time to turn over.

Mike Wills: Peter is the SMSer I've mentioned; we've just got him on the line. Now, you say it's a fairly simple algorithm to work out trade-in value. Is that the same thing as when is the right time for the consumer to sell?

Peter: Good evening, Mike. Yes, look it's, it's a close approximation because ultimately the trade-in value is a, is a, real time value that we would use to predict the future value of the car. So I think what we need to first ascertain is the purchase of the car, why are they buying the car? So, if you have a look at a retail buyer, perhaps the argument is that they should keep the cars a little bit longer than three years. But if we have a look at the way that the fleet managers buy vehicles; they have very specific formulas to work out the optimal time to keep a car for the optimal mileage and they recycle their cars as a matter of a function of their business.

Mike Wills: And do they recycle that on a kilometre number or a time?

Peter: It's a combination of both, Mike. So they will look at how many kilometres they are going to do in a year. They'll look at their cost per kilometre and their total cost of ownership and they'll then make a decision as to how many years and how many kilometres they keep those cars for. Because what you ultimately want to optimise is the difference between the original purchase price that they got the vehicle for and then the subsequent trade-in value. And it's that difference that they call their holding costs and those holding costs are everything to the fleet companies, because it determines what their, what their monthly fee is gonna be, essentially, to run that vehicle.

Mike Wills: Peter, thank you very much. Interesting stuff. We'll move quickly on to Tom in Benoni. Hello, Tom.

Tom: How you doing?

Mike Wills: Yeah, allright. You?

Tom: The best way is you pay cash for the car. Once you're in the system, you hold the car for two years, less than 50 000 kilometres, doesn't even cost you tyres. All you put in is petrol after that.

Mike Wills: Explain that to me. Im not quite sure what youre saying. You're saying less than 50 000 Ks you should sell?

Tom: Less than 50 000 and less than two years. And you buy the new model of the same car that you just had and you pay cash for it.

Mike Wills: And you say that formula... It's an interesting idea. Don't quite know how that works.

Mike Wills: John in Darling. Hello, John.

John: Hi, Mike. Mike, I'm coming from a different angle in as much as all the experts tell us that we must aspire to be debt free as soon as we possibly can. So my suggestion is when you buy a car, buy a decent one by all means, and pay it off as soon as you possibly can. And then, let's say at the end of five years' lease agreement, you now own a car... you... you'll never pay another cent on it apart from maintenance and those maintenance costs will never, never equal your repayments.

Mike Wills: I would agree. I think that is a reasonable approach and he agrees as well. SMS to me at 31702. When you buy a new car you lose 14 percent VAT plus 20 percent when you drive it out of the showroom. Keep your car 'till it cannot go any more! They are a liability and not an asset. Yeah, but as Mike Schussler pointed out, they're a utility asset. We need it, they have value for us but in financial terms you're right. They're not a great asset. Let's find out what all those cars are doing on doing on the roads at the moment.

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