QuestionI went into a dealership to trade in my 2003 Mitsubishi Eclipse GTS and they told me that since I owe more than its worth I cant trade it in and no dealership would allow me to. The eclipse was financed for 28,000.00 I now owe 21,000.00 the dealership priced it for trade in at about 9000.00 leaving a balance of 12,000.00 Cant I just add that to the cost of the vehicle I'm interested in buying (which is priced at 11,450.00) Or are they correct in saying its "un-tradable"?
AnswerHi Chad,
Thanks for you question.
Let me start off with the bad new. The answer to your question is no, in the current situation you cannot trade your car in. You have a large amount of negative equity in your Eclipse, what is referred to as ‘being upside down’ on your loan—you owe more than the car is worth. Unfortunately, this is a very common situation for many car buyers these days who pay a little too much for their vehicles, and then trade early before the loans are paid down. It’s such a big deal that I devoted an entire section to it in my book $ave Thousand$ Buying Your Next Car: Confessions of a Former Car Salesman (www.Make-Me-Smarter.com) to try and educate the car buying public.
Banks know that many people will want to trade early, so they work with dealers to allow loans more for a vehicle is actually worth. For example, on a new vehicle with an MSRP of $20,000, a bank will typically lend up to 20% (depending on a number of factors) more for you to buy it to cover the costs of any money you owe on your trade and other extras expenses. In this case the bank will lend (for example) $24,000 for you to buy a $20,000 vehicle. If the dealer agreed to give you $20,000 for your trade, you would be able to roll the additional $4,000 into your car loan and drive home in your new vehicle. The big problem with this is that you now are paying on a $24,000 loan for something that’s only worth $20,000! Worse yet, part of your monthly payment is being made to pay off the extra $4,000 that was rolled in from your last loan for something you don’t even own anymore. At 6% for a 48 month loan, this adds an additional $93.94 to your monthly payment, which comes to a total of $4,557 with interest over the course of the loan.
Ok, now for your situation. You owe $21,000 on your Eclipse that, after trading you would still owe $12,000 on. The car you want to buy is $11,450. If the banks went all the way to 20% (used cars are usually much less) as I wrote above, this means they would only lend you a maximum of $13,740, and you need a loan for almost $24,000. As far as the banks and dealer are concerned, this is not going to happen.
There are two ways to get out of a negative equity situation like this: keep the vehicle until the loan is paid off, or come up with a $12,000 down payment to payoff your existing loan. My general recommendation is to keep the car you have. You may have a higher monthly payment than you want on it, but it’s much less expensive than borrowing more money for something that just isn’t worth it. No one ever said that cars were good investments.
Sorry to break the bad news to you, Chad, but I hope this helps you.
Regards,
Ron
