Car lease and debt - should I sell at a loss sooner not later

[ajsnook]

I have made many mistakes over the years buying cars (always borrowing to do so as well) and changing them far too quickly (always at a loss of course).

I last did this 4 months ago.  I bought my latest used car (a 5.5 year old) at just under £32k with £3k cash down and the rest funded over 4 years at a whopping 7.6% APR, a final balloon payment of just over £15k and monthly payments of £420.  Road tax, insurance and servicing all quite steep too (as it's a premium SUV).

I've recently been focussed on planning my early retirement, aiming to do that in 6 years time.

I'm really thinking that I should get rid of this expensive car and get something far cheaper.  I've saved up about another £3k in cash.  The current value of my car is probably about £2.5-3k less than the settlement on the finance (£28k settlement vs. £25k+ value).

My options are:
1. Pay a £3k lump sum off the finance to save some interest (but keep the car and its associated expenses)
2. Trade-in the car, settle the finance and get something far cheaper (to buy and run) - to do this I'd have to borrow again, but could get a £15k loan for 3%.  The lesser monthly costs would mean saving probably £200+ per month which I could put in a Vanguard 60/40 to help add to my pension pots.

Sensible head suggests option 2, despite the nonsense of ditching a car after 4-5 months. 

Is it better to do that and mend my ways?

[Car Jack]

Write down on paper every single cost in selling/buying a replacement car.  That's where your plan can go sideways.  If you have to pay taxes and fees to get the new car all set, that can outstrip any savings.  You really need to do the math.  There's no getting around that. 

This isn't just true with cars.  I'm approaching retirement time and looked at lower cost areas and smaller homes.  With the transaction costs, in every case I've looked at, I either save nothing or lose money by downsizing.  I pretty much have convinced myself to stay where I am, which is no big deal.

On the car side, I've made that calculation many times.  I've done the same with whether to keep an "extra" car or not.  We have 4 drivers in the house (DW and both kids) so there is zero way to become a 1 car or zero car family.  Both kids drive an hour to work.  We did sell one extra car as winter approached, so we're down from 5 of my cars to 4.  My older son bought his own car to allow this to happen.  We also can easily afford all these cars.  And I do most of the mechanical work myself.

[jeroly]

Why do you need a car?

If you really do, sell what you’ve got and buy a £2,000 used one.

Once you’ve saved enough to pay cash, and also are fully funding your retirement accounts (ISA?) and have a six month emergency fund, then you can consider a £15,000 or pricier car.

Otherwise, your spendypants car purchases are trashing your chances for secure and/or early retirement.

[Metalcat]

There's no right answer until you solidify what your financial goals are.

Why did you buy a very expensive luxury SUV in the first place??
Why do you feel you need a 15K replacement car?

What do you actually want? What can you actually afford while meeting your financial goals??

Don't rush anything. Look at your numbers closely, figure out what you *can actually afford* and *what you actually need* and make the appropriate transactions from there.

[RWD]

I bought my latest used car (a 5.5 year old)

Okay, sounds reasonable.

[...] at just under £32k with £3k cash down

What... Why so much for a 5+ year old vehicle?

[...] and the rest funded over 4 years at a whopping 7.6% APR

Holy shit.......

[...] a final balloon payment of just over £15k

Yikes.

(as it's a premium SUV)

Well there's your problem!


I agree with Car Jack and Malcat that switching to a cheaper car might not be the solution here. That would be yet another car after just 4 months. The transaction costs of switching vehicles is not to be underestimated. However the real killer in your scenario is that loan! 7.6% is pretty terrible given today's interest rates. If you don't sell is there any way you could refinance the loan to a lower rate (and preferably without a balloon payment)?

[ajsnook]

Thanks all for the very useful comments and questions so far.  I've got a lot to think about (and a lot to beat myself up about too!).

The last point about re-financing is a good one, that is another option.  I could probably get a £25k personal loan at 3% which over 5Y would bump payments up to about £450pm but would save about £100pm in interest in the early months I think but would have less monthly cash to invest.

A lot of number crunching to do... (including ongoing maintenance etc)

[Metalcat]

I bought my latest used car (a 5.5 year old)

Okay, sounds reasonable.

[...] at just under £32k with £3k cash down

What... Why so much for a 5+ year old vehicle?

[...] and the rest funded over 4 years at a whopping 7.6% APR

Holy shit.......

[...] a final balloon payment of just over £15k

Yikes.

(as it's a premium SUV)

Well there's your problem!


I agree with Car Jack and Malcat that switching to a cheaper car might not be the solution here. That would be yet another car after just 4 months. The transaction costs of switching vehicles is not to be underestimated. However the real killer in your scenario is that loan! 7.6% is pretty terrible given today's interest rates. If you don't sell is there any way you could refinance the loan to a lower rate (and preferably without a balloon payment)?

To be clear, I'm DEFINITELY not advocating keeping the car.

I just don't generally give specific advice to people without a clear financial goal. We can tell OP "sell the car!" "buy a 5K 10 year old car!", etc, etc, but none of that really helps OP who actually needs to start making more slow, deliberate, and strategic spending decisions.

If they jump on specific advice here, they're yet again making the same, stupid, impulsive type of decision that landed them with a stupid car at a stupid rate in the first place.

OP needs a plan, not one-time transaction advice.

[RWD]

I bought my latest used car (a 5.5 year old)

Okay, sounds reasonable.

[...] at just under £32k with £3k cash down

What... Why so much for a 5+ year old vehicle?

[...] and the rest funded over 4 years at a whopping 7.6% APR

Holy shit.......

[...] a final balloon payment of just over £15k

Yikes.

(as it's a premium SUV)

Well there's your problem!


I agree with Car Jack and Malcat that switching to a cheaper car might not be the solution here. That would be yet another car after just 4 months. The transaction costs of switching vehicles is not to be underestimated. However the real killer in your scenario is that loan! 7.6% is pretty terrible given today's interest rates. If you don't sell is there any way you could refinance the loan to a lower rate (and preferably without a balloon payment)?

To be clear, I'm DEFINITELY not advocating keeping the car.

I just don't generally give specific advice to people without a clear financial goal. We can tell OP "sell the car!" "buy a 5K 10 year old car!", etc, etc, but none of that really helps OP who actually needs to start making more slow, deliberate, and strategic spending decisions.

If they jump on specific advice here, they're yet again making the same, stupid, impulsive type of decision that landed them with a stupid car at a stupid rate in the first place.

OP needs a plan, not one-time transaction advice.

Absolutely agree.

[ericrugiero]

Thanks all for the very useful comments and questions so far.  I've got a lot to think about (and a lot to beat myself up about too!).

The last point about re-financing is a good one, that is another option.  I could probably get a £25k personal loan at 3% which over 5Y would bump payments up to about £450pm but would save about £100pm in interest in the early months I think but would have less monthly cash to invest.

A lot of number crunching to do... (including ongoing maintenance etc)

As others have said, you need to think about your goals.  This website is mostly for people who want to save enough money to retire early.  That requires not making the "normal" decisions like spending all your money on a depreciating asset like a car and paying interest on that "asset".  Is your goal to have a nice car to enjoy while you work till 65?  If so, keep the luxury SUV a year and then buy another every year or two.  Tons of people take that path because it's easy and is nice right now.  If your goal is financial independence with the option to retire early, you need to look hard at what that car is costing you.  It's amazing what vehicles can cost between depreciation, profit for dealers, interest, taxes, registration, maintenance, fuel, etc.  LOTS of people spend enough on vehicles to fund a very nice retirement at 60.  ($400/month invested at 7% return for 40 years is over $1,000,000.)  Setting a goal and really thinking about how nice financial independence would be could help you to decide it's worth it to drive a more sensible car. 

If you decide you want to be more intentional about how you spend your money, definitely sell that crazy expensive SUV.  You lost money buying it.  That money is gone.  If you sell it, you aren't really losing more money, you are just admitting you already did.  Buy something you like that's much more sensible.  Keep if for a long time (transaction costs on vehicles are high).

[ajsnook]

...Setting a goal and really thinking about how nice financial independence would be could help you to decide it's worth it to drive a more sensible car. 

If you decide you want to be more intentional about how you spend your money, definitely sell that crazy expensive SUV.  You lost money buying it.  That money is gone.  If you sell it, you aren't really losing more money, you are just admitting you already did.  Buy something you like that's much more sensible.  Keep if for a long time (transaction costs on vehicles are high).

Thanks - I agree completely.  I'm 49 now and want to retire at 55.  Cars have been my bugbear financially.  I'm maxing out my pension to help with my retirement plan, but by focussing on these next few years I've seen that the paper loss on this car is a sunk cost (you're right, it's gone - I'm not losing more on it, in fact really I'd be making money by not continuing down this expensive path). 

i'm pulling together the numbers and the sell out now and buy something a lot cheaper and invest the rest certainly seems the way to go at the moment.  When I've completed the number comparisons I'll try and share here to show the lunacy of what I've done to date (in the spirit of helping others).