Have you seen this?
I can’t believe an article like this had to be written…
I mean, I thought it was pretty common knowledge — haven’t car commercials even poked fun at the idea that a new car is worth half as much the minute it leaves the lot?
I think it was an old Saturn commercial with Jim Gaffigan. I may be mistaken.
Either way, this problem is directly a result of people lacking financial knowledge — and only looking at the bottom line.
When a person tries to trade in a vehicle after only a year or two of ownership, one that they’d put little or no money down on, well, it’s obvious that they’re going to owe more than the car is worth right out of the gate.
When they finance the next car, where do they think the negative equity goes?
It’s obvious to me. Scary to think that it’s not obvious to many…
The money they owe on the trade-in doesn’t just magically disappear — it’s rolled into the new loan.
Pretty simple really. Thankfully, for those that didn’t click the link, the article points that out.
My words of advice — which I can’t even claim to have followed in the past:
- Don’t buy a car if you can’t put at least $3,000 cash down or if you’re going super high end, at least 10%.
- Don’t buy a car if you are trading a car that is worth less than you owe on it.
- Don’t buy a car if you need to take a 48+ month loan to keep the payments affordable.
To my credit, I’ve never traded in a car that I didn’t own outright.
As for the other two suggestions, well, let’s not go there…
I really don’t understand some people. I see this all too often in my line of work where people are in dire financial straits almost entirely due to their obsession with vehicles.
What should be common sense regarding financing a rapidly depreciating asset is hardly that. Even when you put a little money down, people rarely think about the fact that they probably have more than the cost of the car getting rolled into the loan. Taxes are the biggest culprit. You can easily find yourself adding 1-2k onto the loan just with sales tax, so even putting that much down won’t give you any equity. And the length of loans available now… holy cow. Most people don’t keep their cars for more than 4 years (not to mention how long cars can be expected to last), yet 7 or 8 year loans on a car are not all that uncommon.
I’ve been meaning to make a post about auto loans for a while, so this caught my attention. It’s sad, and frustrating to see people enter a downward financial spiral just so they can have a status symbol.