QuestionOk I called about one few ago and the payoff amount of my car was between $7500 and $8000. I am stuck in a five year deal. I have only been paying on this car for one and a half years. I financed between $9000 and $10000. Within the year and a half I have had this car I have put well over $4000 worth of work into it. I have looked at the value of my car and could get approximatly $3000 for my car. If I bring in a down payment of lets say $2000 that would leave me with a balance somewhere between $2000 and $3000 that would be tacked on to the loan of the new car. If I have already been paying a car note high enough for a new car(car note plus repairs) would it really matter??
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Thank you for the advice. I know I will be upside down if I trade in this car. I owe over $7000 and the trade in value of it is only like $3000. Right now I just need a more dependable car and I feel it would be in my best interest to pay a higher car note than to spend the same amount of money getting the car I have now fixed plus pay the car note. So are you advising that it would be best to wait to trade in this piece of junk I financed until I can pay it down some more??
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I have been financing this used car for a year and a half now. From the beginning I have had nothing but problems. Now I want to trade it in for something new and more dependable. I was told that because I have been financing this car for less than two years my interest rate would be high. Is that true? Secondly would my finance company be willing to work with me in switching to a new car??
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Hi Dee,
Thanks for your question.
I've never heard of anyone being charged a higher interest rate because of trading a car in that you've had for less than two years. Any loan you have would be based on your credit score, payment history, income, etc. Either someone is mis-informed and giving you bad advice, or if it's a dealer telling you this, they're going to try and get more money from you by charging you a higher rate.
As far as any financing company is concerned, they make money by lending money; I'm sure they will be more than happy to help you. But in addition to your credit situation (as above), they are also interested in the type and value of the vehicle you're buying. Some dealers try to sell pre-owned cars for a lot more than they're really worth, and as you can imagine, any bank, finance company, etc. will only lend up to a certain amount.
I don't know how much you owe on your current car, but I do advise you to be very careful about trading it for less than you owe, and then adding the remainder into your new loan. This would put you in a negative equity situation (aka being upside down on a loan) where you owe more for something than it's worth. Dealers love to do this, anything to get you in a new (or pre-owned) vehicle, but it's a very costly, and very bad financial decision. I wrote an entire section on it in my book $ave Thousand$ Buying Your Next Car: Confessions of a Former Car Salesman (www.Make-Me-Smarter.com)
Hope this helps you a little, Dee.
Regards,
Ron
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Morning Dee,
Thanks for your reply, and follow up.
Well, what you do is ultimately up to you, of course. But I want to make sure you know the results of what you're going to get into.
As far as pure cost is concerned, if you financed the roughly $4,000 that you're upside down on over four years, at say an average interest rate of 6%, you would be adding an additional $97.93 per month to your payment, which adds up to $4,700 over the four years—you’ll be paying an additional $700 in interest payments! But in most cases like yours, what happens over four years is minor compared to the additional (nearly) $100 more a month your going to have to come up with. Even worse is that you're paying all of this money for something you don't own anymore! What a waste of money this is. No surprise that dealers love this when you finance with them--extra money in their pocket as soon as you sign the papers.
From a straight finance perspective, this is a bad deal for you, but great for the dealer. However, I've been in your situation and fully understand the desire to not have to keep dumping money in your old car. Here's what I suggest, Dee:
1. Again, from the finance side, decide if the amount of money you're spending, or project to spend over the next year, is the same as what you'll end up paying for the next car, plus the extra $100/monthy ($4,000) payoff.
2. I know it's hard to do, but make your decision based on both the emotional desire to get a new car, and all of the hard numbers. The worst thing I've seen people do is buy without knowing if they were getting a good deal (rare!), bad deal (common), or being 'taken to the cleaners’ (more common than you would ever imagine.) As long as you make an informed decision, you know exactly what you're doing and what it's going to cost you.
3. Finally, consider selling your car yourself. Let's say you advertise it and get an interested buyer. You show her the receipts for all of the work that's been done to the car, which is work that (probably) won't have to be done again. Truthfully, this is a positive point for a buyer. If you ended up selling the car for $3,500, you end up with $500 more in your pocket, instead of the dealers. Or you might get an extra $1,000. Price it based on the going rate for your type and year of car, which you can find online. Also realize that dealers buy at wholesale or below; most people can expect to get much more on the open market that from a dealer.
Ok, enough of my rambling this early in the morning. Does this help? Let me know what you do next, Dee.
Regards,
Ron
AnswerHey Dee,
Yeah, sometimes it's cheaper to buy your way out of a bad situation, like you have here. By itself, being upside down on a car loan is not good. But when you consider all of the facts including what you've already spent, potential ongoing repairs, and also feeling good about what you're spending your money for, it may be the best choice.
Given a similar set of circumstance I'd probably get rid of the car and take the hit with the negative equity, minimizing it the best I could with the down payment, the same as you're considering.
Now, after these discussions, I hope you'll send me one more follow up to let me know what you end up doing, and driving!
Regards,
Ron
