Steve wanted to upgrade his work ute. It was old, business was booming and he knew his old ute wasn’t doing him any favours getting new work. The old Triton couldn’t keep up with the demand of his growing and successful business and he needed more towing capacity, as well as a larger tray to fit more machinery. The problem was, the quote from the car yard for a trade in wouldn’t even cover how much he owed.
“Liz, what do I do?! I thought I’d get heaps more on the car but the trade in quote means I’ll still have a few grand left owing on the truck with Capital!”
Trading in your car can be an exciting time, new wheels means more capacity to do more work. You can’t help but feel like your business is doing you proud when it can afford shiny new equipment and investing in your business is investing in your future.
The issue is that cars are losing their value faster than ever: “Steve, cars are devaluing faster than ever, so we have to be careful that when we finance this upgrade we take this into account!”
Cars are devaluing faster – particularly some makes here is a great link to explain some of these issues. http://wealthartisan.com/why-do-new-cars-depreciate-sharply/
I asked Steve “Did you put a large balloon payment to the end of your term?”
“Yeah I seem to recall I did. I didn’t put any deposit down at the time either. The other thing is, I’ve put tons of clicks on the car as there have been lots of jobs out of town. I’ve really worn the old thing out to be honest.”
“Ok” I said, “that’s fine, and perfectly normal, but now that you’re trading in and upgrading, the wear and tear means you’re getting less than what you owe on it. This is called negative equity. “
I explained to Steve that we’d be able to roll the remaining debt owing into the new finance with no issues, but we were going to build in a smaller residual this time, and accelerate his repayments so that he wouldn’t fall into the same trap. We only allocated 15% to the balloon instead of the normal 30% as he really wears his cars down. Given rates had dropped so much since his last car finance the repayment was only $40 per month more. “Gee that’s ok, and now I can rest assured this won’t happen again in 5 years as I’ll be ahead in my repayments!”
We like to know how your business operates so that we can understand and strategize your finances in advance. Simple tweaks like this won’t be noticed over the short term, but can deliver benefits at upgrade time by not punching you in the wallet!
Wilson Financial, we understand the fine print so you don’t have to.