Buying a nearly-new car makes lots of sense. But check out movements in the new-car market first!

By Stuart Johnston

So many people are keen on buying the so-called “demo model”. But if this was as simple as it sounds, everyone would be doing this and saving themselves a suitcase-full of money. The reality is that buying a low-mileage used car still needs some careful thought.

 

It has been said in recent years that a new car can lose up to 20 per cent of its value after just one year of ownership. However, this figure varies according to make and model, with the most popular-selling cars such as Volkswagen Vivos and Toyota Hilux bakkies retaining much more of their value than less-popular brands.

Discounting of new cars has a serious effect on trade-in prices and second-hand prices

But recently, the pressure on new car sales in a depressed market has resulted in trends where new cars are being discounted heavily. Discounting of new car prices is having a serious knock-on effect on both the new car and used car trade, according to an experienced motor dealer.

The dealer, who has extensive experience in both the franchised new car trade and privately-owned used dealerships, says that this has led to a situation where the devaluation of a new car once it leaves the showroom floor can be as high as 30 per cent.

Manufacturers enable heavy discounting of new cars

“What is happening is that many manufacturers are underwriting the heavy discounts on new cars. The so-called ‘dealer assistance’ on expensive cars in the R800 000-and-above bracket  can be as much as R100 000, which is then passed on to the customer against the list price of a new car.

“This is all very well and good if you are one of the lucky ones who recently bought a new car at a R80 000 discount. But what if you paid full dealer price a few months prior to the manufacturer-assisted discount kicking in?

“Suddenly you are faced with a situation that your car, even a low mileage, well-cared for example, is worth R80 000 less than you thought it was. What would be the incentive for someone to buy your one-year-old used car at a reasonable reduction, when that person could get a brand new one for the same price, or even less, for what you are asking for your carefully-used example?”

What are dealer-assistance programs?

Simply-put, dealer-assistance programs are implemented by many motor manufacturers (both importers and manufacturers who build cars locally). These programs enable a dealer to offer substantial discounts on new cars that are not selling as fast as the manufacturer would like.

These schemes are normally put into place when a decision has been made at manufacturer upper management level to move stock that has been sitting unsold in showrooms for a length of time. Manufacturers then offer their dealers money incentives to sell a particular make and model of the brand at substantial discounts. These discounts are advertised in dealer advertisements regularly along the lines of “Save up to R85 000 on your new model xyz!”.

Unrealistic sales targets

The situation, says the dealer (who wishes to remain anonymous), is caused by manufacturers who initially set unrealistic monthly sales targets for their cars. In many cases, he says, it is worth a new-car dealer to sell a car at below cost, without any profit margins at all, simply to achieve a sales target set by the manufacturer. The reason a dealer is prepared to do this (sell a car for less than the dealership paid for it) is  because the financial penalties for not achieving those sales targets would be greater than the knock the dealer would take on selling the car at a loss.

The knock-on effect impacts on used cars

This knock-on effect means that, after a certain period into a new model’s life-cycle, used values of that can model drop accordingly with the “dealer-incentive” discounts implemented. This can work for you if you bought your new car at a substantial discount. But if you paid full list price, it will mean that you cannot find enough equity in your current car to trade it in at a reasonable price.

So what should the careful  used car buyer do to get the best deal?

1. Take your time in researching both new and used pricing trends. If you click here, you can follow used car buying trends on AutoTrader, and compare them to current new car list prices.

2. Avoid buying demo models that have been recently-launched. The smallish discount you negotiate compared to a new model may just be undercut when a manufacturer starts offering substantial discounts down the road  on brand new examples of your chosen model.

3. Even if you are planning on buying a low-mileage used car, phone around to new-car dealerships and find out what sorts of discounts are being offered on new examples of the car you are planning on buying.

4. Find out how well new examples of the low-mileage car you have targeted are selling. These monthly sales figures are available from the National Association of Automobile Manufacturers of South Africa (NAAMSA). A new car that continues to sell well at full list price,  even after a few years into its model cycle, is not likely to be discounted soon.

5. Understand that if you are going to buy a nearly-used car at a substantial discount, that this discount has been offered for a reason. The chief reason being that the car you have targeted has become less popular than it was when newly-launched. And that this trend in unpopularity may still make this car difficult to re-sell at a reasonable price further down the line.

6. On the other hand, if you plan to hang on to this car for five years or so, it may make perfect sense to take advantage of the lower (discounted) price now. Once a car becomes older, depreciation tends to level out.

7. After taking all this into account, it still makes sense to buy the car you really like, because you have to live with it. So, apart from test-driving various examples, read up as much as you can about it first. In this regard, you may find useful advice if you click here, which will take you to AutoTrader’s car review pages.