QuestionQUESTION: Morning, Sir, thanks for taking the time to read this.
Okay, say I have a car that has a $13,000 payoff on it, but it's only worth (according to blue book) around $6900. Would a dealership somehow take it as a trade for a car that they want $6900 for and then finance the difference, i.e., $6000 or so?
I was told that generally banks don't loan more than what a car's worth, but would this instance sort of be like saying, "here take my $6900 car and 'sell' me that other car for $6000" which would be less than it's value making a loan possible. It's sort of like giving them the other car for free, I guess....
Thanks!
ANSWER: Good Morning, Shane, and thanks for your excellent question.
Let me first make sure you understand that ‘blue book’ value is not what a dealer will pay you for your trade. For example, randomly picking a 2005 Toyota, Camry in excellent condition with standard options and miles, the suggested Kelly Blue Book® value is $16,065, while the trade-in value is $12,000. Unless a dealer has already told you that would give you $6,900 for your trade, you may not be working with the numbers you think you are.
Now to your question.
Depending on the financing institution and a number of other factors, banks will lend up to 120% of the market value on new vehicles. They do this to help cover any outstanding loan amount that might be remaining on the vehicle you’re trading in. While this may sound like a good idea, it puts you in a very bad financial situation where you are upside down on the new vehicle loan: you owe more on your new car than it’s worth. This is so important, and the financial ramifications so bad, that I cover it in great detail in my book: $ave Thousand$ Buying Your Next Car: Confessions of a Former Car Salesman, www.Make-Me-Smarter.com.
The 120% doesn’t necessarily apply to pre-owned vehicles, but depending on the type, model, year, mileage and condition, banks may be willing to lend more than the current market value. Please note that two times I mention market value, which is different that the purchase price of a vehicle. If a vehicle is only worth $10,000 according to the banks, but you agree to pay $12,000 as per the dealer’s asking price, the banks would base their financing on $10,000.
From the dealer’s perspective, the only time they would generally consider to do a deal like this is when they will be making a killing on the amount of profit they put in their pocket. And if this is the case, it would be a very expensive (AKA horrible) deal for you.
Now, one more thing. If the deal happened the way you asked it, it would actually be two separate financing deals. Your current loan would have to be completely paid off and a second loan established, which would look something like this (again, using your numbers as examples):
Current loan (payoff) $13,000
Trade-in $6,900
Loan balance remaining $6,100
New vehicle purchase price $6,000
Plus loan balance remaining $6,100
New loan amount $12,100
So, if things worked just as you asked, you would have a new loan that was almost the same as your current loan amount. Actually, when you add in tax, title & license, plus interest on the loan (and any number of other charges a dealer will want to add on,) the final cost to you will be much greater than what you owe right now. And this doesn’t even consider that your new loan will be for another 4, 5, or 6 years, whatever term you decide to finance it for.
The bottom line is that financially, based on the examples I’ve used, this would be a very costly deal for you, and that’s considering if the dealership or banks would even do it. If they did, the dealer would be the only winner, which is exactly what they want.
Hopefully this will help you make a better decision. Let me know if you have any follow-up questions I can help you with.
Good Luck, Shane!
Regards,
Ron
---------- FOLLOW-UP ----------
QUESTION: Yeah, I can see what you're saying. I need to look at it as two transactions. The way I thought of it initially (and still kind of do - wishful thinking?) is that I figured my 6900 would cancel out the 6900 asking price of the other car and they could just finance the difference.
By splitting it up into two sequential transactions, I can see how it works in the dealer's favor because I have that difference left over, so when I then try and get this other car, that difference is still out there needing to be taken care of too.
Like I said, I guess wishfully thinking, the dealer would be able to say okay your value for mine, now we're even, just pay the outstanding difference, but that's not as profitable - or likely - is what you're saying, right? Again, thanks for the insight.
AnswerYeah, unfortunately just wishful thinking, Shane. And you're right that it wouldn't be as profitable for the dealer. What's really unfortunate is that I've seen first-hand, and hear from so many others on allexperts.com, on the really bad deals that car dealers are willing to, and do make. Let me give you a very personal example.
When I bought my last new car, if I would have walked onto the lot, picked out the one I wanted, traded my BMW, and accepted the payment they gave me, adding everything up they would have made $19,000 more on the deal than I actually ended up paying! Yep, you read that right--$19,000! This happens to unsuspecting buyers every single day, and is one of the reasons I had to write my book. For the most part, if you ever thought you got a good deal when buying a car, it's very, very unlikely that you actually did.
So like I said, if they would do the deal it would be very bad for you, but great for them.
Financially, it would be better to keep the car you have, but I do understand that sometimes this is not the best option. If you do need to buy something else you should consider selling your car yourself. Dealers are notorious for making a lot of money on traded vehicles, especially when they offer you more than it's really worth. All they're doing is moving the money around in ways that make you think you're getting the deal of a lifetime. Even if you end up with an extra $500 or $1,000, it's better for you to have it than literally throw it away to a dealer and get nothing in return. I sold my car (above) myself and got $4,500 more than the dealer offered me!
Thanks for the follow up, Shane. It's not often that I get a response to my messages; I really appreciate it, and wish you the best of luck.
Regards,
Ron
