QuestionI have had my Durango for a year-my problem now is that I am 7,500 miles over already. Since 07 are coming in, I can get a great rebate along w/ my employee discount. I owe per Chrysler $25,000 as a buy out-I'm only getting about $16-$17,000. Therefore, I'd have some MAJOR negative equity. The reasons for trading in are-something smaller w/ better gas mileage, I will save on insurance & save my self @ turn in time.
I have had some dealers willing to work w/ me & I have been approved for a 84 month loan (to keep my payments down). If I end up keeping it how exactly does that work? Do I have to go back the Chrysler dealer? Will they just roll the $ in to another car? If I decide to keep it will I have to get another loan to pay off what the car is worth?
AnswerHi, and thanks for your question.
You’d be surprised at how many people add negative equity every time they buy a car, new or used, and financially it’s a very bad thing to do. So much so that I cover it extensively in my book, $ave Thousand$ Buying Your Next Car: Confessions of a Former Car Salesman (www-Make-Me-Smarter.com.) What negative equity (AKA being upside down on loan) really means is that you end up paying money, in this case $8-$9,000, for something you don’t own anymore. And this isn’t even considering the cost of breaking your lease.
It gets worse once you consider the added interest you pay over the period of the loan. In this case, $9,000 @ 6% over 60 months (which is all my payment calculator will go out to) adds $174 to your monthly payment, and will cost you a total (60 * $174) $14,616. That’s at least $5,616 in interest payments! It’s even worse if you take this over the 84 months they’re offering you. If gas was at an average price of $3.00 / gallon, you would be able to buy an additional 4,872 gallons just on what you’re paying on the loan for the Durango you no longer own.
Regarding paying lower insurance rates, I don’t know you’re rates are, but it’s unlikely your payments are going to come down much more than a 5-10% at best. The extra $14,616 you would essentially be throwing away would cover this for at least the next 20 years.
Ok, now let’s consider the 84 month loan. Yes, it will keep your payments down, but there are two costs to consider here: first is the extra interest you pay over that time, if you decide to keep the vehicle for that long (which is extremely unlikely.) Longer term loans cost more money. Second is that if you trade or sell the vehicle before paying it off, you will have even more negative equity added to an already bad situation. I give a couple of examples in my book that show you how quickly you get the point that you need a lot of cash for a down payment to buy anything.
The dealership offering you the 84 month loan is NOT looking at your best interest--at all. I’ll bet they’re telling you something like ‘since you’re not going to keep this car for seven years anyhow, why pay all of that extra money every month.’ Easy for them to say: they will make a ton of money from this loan the moment you sign the papers. They don’t have to wait seven years. They stuff all of the profit they make from you in their pocket right then when the deal is done. They will also make another ton of money by selling your Durango the next day, the same one you’re going to be paying for over the next 60 months.
Now, regarding your lease. It costs money, based on the rate specified in your lease contract, to terminate it early. If the dealer trying to do the new deal with you tells you it won’t, it probably because they’re going to make enough on your deal that they’re going to pay the penalty for you. It’s usually true that nothing in life is really free; it’s especially true at a car dealership.
Ok, I guess you can figure out my true feelings about this deal. No, it is not a good financial deal: it will cost you a fortune for years to come, regardless of whatever employee discounts and rebates you have coming. You will not make it up in savings at the pump, or through your insurance rates.
My recommendation is that you make this decision based on good financial sense. Since you already have a great vehicle, you’re in the (yes, pun intended) drivers seat on this deal. Most people get lousy deals because they use their emotions to make financial decisions (also in my book.) No matter what vehicle you’re looking at, or how great a deal it may seem, there will be another one equally as good tomorrow, and every day for the rest of your life. And there will be equally as many that don’t end up costing you, and making some dealer a small fortune.
I hope this helps you. Please let me know what you decide.
Regards,
Ron
