Have you ever gone to trade in a car you “own” only to find that you owe more on it than anyone will give you for it? I am sure a lot of people have; I have too. I once had a Volvo that while I had gotten a great deal on it at the beginning, was worth less than what I owed on it because I had not put any money down when I bought it. So when I went to trade it in on another car, I actually had to pay $1,500 to offset the difference! And before anyone says anything, I did try to sell it on my own but could not find a buyer. Thus, I had to trade it in.
Doing the math the easy way, let’s say the new car I was buying was priced at $20,000. But now that I still owe money on my trade in, that car now will cost $21,500. Seems silly, doesn’t it? If I take out a loan for this new car, not only am I financing this car itself but also part of the previous car! Most of the time this happens for 1 of 2 reasons:
1. The buyer financed 100% of the previous car, so after paying a bunch of monthly payments the principal balance did not go down that much.
2. The car is not worth what you thought it might be worth after some time. For instance, SUV sales are flat because of the price of gas. So if you bought an SUV a few years ago when gas was cheaper, you might have figured you could sell it later on for a good amount of money. Fast forward to today, and no one wants an SUV because of the price of gas – thus you older car is no longer worth what it could have been worth if circumstances hadn’t changed.
So how does one avoid ending up with a car that is worth less than you owe on it? For starters, when buying a new car always try to put as much as possible down so you can finance less of the price. This helps builds up principal right away. Try to always get the best interest rate you can, which is usually going to be through a credit union. Shop smart – Hondas and Toyotas hold their value longer than other cars do. Think long term – what kind of car might you need in a few years? Will you be having children or moving somewhere where you will need 4wd?
Of course, you could either pay in cash and/or buy a used vehicle, which really helps…but we all know that is not going to happen for everyone. Personally I like to buy a new car and keep it for a very long time, but that is just me. The important part is just trying to avoid owing more on your car than it is worth; it leaves you with no options and higher payments if you wanted to get a different car!
photo by Danilo Prates