Changing your car for a newer model before it loses too much of its resale value is good old-fashioned common sense. Fail to do so, and you could end up in the unenviable position of owing more money on the car than it is actually worth. Fortunately, avoiding this scenario is quite easy. In fact, choose to refinance, and you could even lower your payments on a new car.
But before we get to refinancing, first things first, make a plan and do some homework.
Decide when to sell or upgrade
When you drive out of the showroom in your brand new car, selling it is the last thing on your mind. But no matter how excited you are by your new ride, from the moment you decide to buy you should have an idea of when you would like to sell.
Make a plan to upgrade your car every two or three years and try (if your situation allows) to stick to it. Setting out a plan in this way not only works as a reminder of when it’s time to upgrade but also allows you to make the most of the car’s value.
Keep an eye on the market
Even though you may have set out your plan to upgrade after a set number of years, it’s still worth keeping an eye on the market. While it doesn’t happen very often, every now and then a manufacturer produces a car that just doesn’t sell very well. And if you bought one, then this is bad news for you.
If a dealer is struggling to shift new models, your used one probably won’t be worth as much as you thought it would. Pay attention to the value of used models on RedBook, and if it looks like the car’s value is dropping way too fast, then you might want to consider upgrading sooner rather than later.
So what’s so great about refinancing?
Refinancing your car is a great way to upgrade to a newer model before you finish your loan term. Aside from postponing that dreaded residual/ balloon payment at the end of the term, there are two main reasons to refinance.
It saves you money
Let’s say you bought a car for $20,000 and financed it over three years at around 6%. You paid a deposit of $2,000 and financed the remaining $18,000 with no residual payment at the end of the loan term.
At the end of two years, you still owe $6,660 (remaining payments + interest) on the car, but the car is worth $12,000. This means that you now have $5,000+ to use as a deposit on your new car. And because you’re now putting down more than twice the deposit that you did the first time around, your monthly payments on a new car in the same price range should be lower.
Now, it might be tempting to take back some of that cash and go ahead with another $2k deposit or even no deposit at all but do this, and you’re not making the most out of the value of your car. Sure, you’ll get some cash in your pocket, but you’re starting back at square one again with the same loan payments.
Putting down that larger deposit means that you borrow less money and therefore lower your monthly payments. And this cycle continues each time you choose to refinance when upgrading your car every couple of years.
Keep it up for a prolonged period, and you’re looking at extremely low payments on a new car every two years. Sounds like a sweet deal if you ask us.
It helps you level up to a higher spec
Yes, that’s right. Choose to refinance at just the right time, and you can upgrade to a higher spec model than your original car. Remember that $5,000+ we mentioned earlier that you could put down as a deposit? Well, if you’re not too bothered about lowering your monthly payments then you could use the larger deposit to upgrade to a higher spec model.
So this means that instead of looking at a $20,000 car you can now choose a $23,000 car while still only needing to borrow $18,000. Your monthly payments will be pretty much the same, but you’ll get a better car for your money.
And again, this cycle repeats every couple of years as you continuously level up to higher spec cars but continue to make the same monthly payments. You’ll be at the top of the range before you know it.
As you can see, getting the most out of any refinancing deal is simply down to good timing. Refinance too early and you haven’t paid enough off the loan to make a real difference, wait too long and the value of your car could be less than the money you owe. Generally speaking, if you plan for every two to three years then you should be okay but whatever you decide, make sure to give us a call here at 1300 STRATTON (1300 787 288). You could say that we know a thing or two about car finance and refinancing so if you’ve any questions one of our consultants will be only too happy to walk you through the process.