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Money Mistake Monday – Owe More Than It’s Worth Syndrome.

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.

or

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


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Comments (5)

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  1. Jeremy says:

    Another thing people don’t realize is that when you finance a car, new, used, or whatever, you’re usually financing much more than just the cost of the car. You could have a couple thousand extra just from taxes, title, etc.

    So, if you put little or nothing down, you’re already upside down the moment you drive away, and it could take a year or two just to put a dent in what you paid for taxes or other fees. And unless you keep your car until the loan is paid off (which isn’t very common for most people) you’re going to end up costing yourself even more money come time to sell or trade in.

    The best thing you can do in a little or no money down situation is to pay a little extra each month. You’d be surprised how much just $50/month more will help. Depending on the loan terms, it could shave off 6 months to a year off the loan, hundreds or even a few thousand dollars in interest, and help make sure that when it comes time to get rid of it, you’re not stuck financing the amount you still owe.

  2. David says:

    Very true, I should have mentioned that. Thanks Jeremy!

  3. Tim says:

    Jeremy’s suggestion only works if the loan company puts your extra payment towards principle rather than interest. Read your contract before doing this.

  4. LJ says:

    We buy new and drive forever-that is how we are able to afford new cars- we pay them off, save for down payments(or for as much of the purchase as we can) and use every discount available to us. We rarely end up with a car payment and we never end up upside down. The last time I made a trade-2 years ago. We endedup driving home a 47K Tahoe for a grand total of 13k. Between discounts, bargaining and a trade in we paid 13k out of pocket for a brand new ultra awesome car. Not too shabby.

    What you say is true- people finance more than a car is worth because of owing too much on a trade in.

    Another way to avoid that is to skip on the extras salesman offer you-extended warranty,service packages, pain protection, etc. You end up financing and paying interest on things you don’t really need, putting you further into the debt hole.

    Save up and pay as much down as you can.

    Take Care

    LJ

  5. […] Money Mistake Monday topic was owing more than your car is worth. I’m glad to say that our car is theoretically worth more than we […]

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