Author Topic: Downgrading a car with positive equity?  (Read 3403 times)

darkelfx

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Downgrading a car with positive equity?
« on: December 18, 2018, 10:32:00 AM »
Current Situation:

I purchased a new 2018 Subaru WRX for $28k @ 3% APR about a year ago. I've been aggressively trying to pay it off since then and I currently owe $12k. I am not struggling financially to make payments and this desire to downgrade is more because of lifestyle changes and not really needing such a nice car.

In my one year of ownership, I've only put 5k miles on it. My commute is only 12 miles round trip and my gas cost is around $90/month.

Through various dealer/vendor appraisals, my car is worth on average about $23k now.

Three reasons why I THOUGHT I needed this car:
AWD (Was expecting to move to an area that snows frequently)
New (Didn't want to deal with repairs/maintenance)
*I'm a pretty aggressive driver by nature (primary reason why I bought it and this car is much more fun to drive. I do things with this car that I couldn't do with a normal sedan like a Camry/Corolla)

I want to downgrade because I don't really need AWD anymore (not going to that snowy area anymore) and I'm shifting my views to seeing cars as a means to get from point A to B. In that regard, does it really make sense for me to keep this car?

All the cars I've been looking at are in the $10-$15k range so I'll have positive equity when trading in my Subaru (thus either eliminating or lowering significantly my loan balance).
I've been looking at used Nissan Leafs because they're so cheap and my commute is very short so range is not an issue. I've also considered the Chevy Volt as well, but my concerns with both these cars are reliability and maintenance. One of the reasons I bought new was for the peace of mind knowing if I had issues it could be fixed through warranty.

Would it be worth it to trade down and get a cheaper car? Or just keep my current one? My plan either way is to drive the car until it dies on me. I don't plan on getting another one until I absolutely have to (which probably won't be until 5+ years from now).

Any suggestions would be greatly appreciated. Thank you!

SweatingInAR

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Re: Downgrading a car with positive equity?
« Reply #1 on: December 18, 2018, 11:59:01 AM »
Nice decision! Sell that thing private party and buy a used Leaf!

In my two years of 2013 Leaf ownership I have: rotated the tires a couple of times, replaced the hatch lifter cylinders (took longer to find the right ones in stock than to do it), and volunteered to have Nissan replace the modem with a newer one (they discontinued 2G service).

As long as you have a place to plug it in each night, it's a great choice. It would NOT be a joy to own a Leaf if I didn't have charging at home. If you don't have a place to charge at home, I recommend skipping a PHEV or EV.

When I was shopping, I considered plug-in hybrids, but they were all several thousand more than a Leaf in my market. (Volt, c-max energi, or plug-in prius/prius prime). That several thousand can pay for a lot of rental cars for road trips. PHEVs are also far more complex than EVs, which influenced my decision.

M5

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Re: Downgrading a car with positive equity?
« Reply #2 on: December 18, 2018, 12:13:50 PM »
That's a tough decision. At your current pace it'll take you less than 10 months to pay it off. How much do you value the extra gas savings from an electric vehicle such as the Leaf or Volt vs reliability and your stated enjoyment from driving this car? Subarus are usually bulletproof and last forever, so I don't think the warranty would play much of a factor IMO. It's extremely likely you'll surpass the warranty period long before anything needs to be repaired.

If you continue to only drive 5k miles a year, I'd recommend looking at vehicles even cheaper if you really want to downgrade. Almost any beater could make a 12 mile round trip. The savings in liability vs full coverage insurance is also another thing to consider. In the end it's really up to you if delaying extra retirement contributions is worth it.

Boofinator

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Re: Downgrading a car with positive equity?
« Reply #3 on: December 18, 2018, 12:39:26 PM »
I had a similar dilemma a few years ago when I was seriously starting on the road toward FI, though in my case the sports car was an "extra" vehicle. The way I made my determination was to consider the cost for each thrill that the car brought me.

My calculation went something like this: For every year I owned the car, I was paying approximately $5000 extra between depreciation, insurance, registration, gas, etc. Meanwhile, I was probably getting about 5 days of thrills out of the car per year (annual autocross several hours away, occasional out-of-town trips, etc.). So I figured I was paying roughly $1000 per day of thrills. This was not worth it, so I sold it as quickly as I could, private party. Meanwhile, my motorcycle was also an extra, but was much more depreciated and got better gas mileage. I figure I spend roughly $500 extra per year to still own it, and that my per thrill cost is worth it to keep it.

I'm going to go against the grain here and not recommend a Leaf (or other pure electric car) unless it is not your sole car, if you like to travel at all. Other people say rent when you need to travel, but I think when you factor in rental car costs you've just offset any savings you've received by using electricity rather than gas.

darkelfx

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Re: Downgrading a car with positive equity?
« Reply #4 on: December 18, 2018, 01:58:32 PM »
Thank you for all the responses!

I think what I'm really struggling with is I have a strong burning desire to reach FIRE as soon as possible, but I want to have something to enjoy along the way. The idea of treating yourself a little, but at the same time do I really need this enjoyment? It will take me approximately 6 months to pay this off completely on my currently salary, but I guess maybe I just want those 6 months back to be able to invest the money versus using it to pay off my car loan. I guess this goes deeper than just swapping out cars lol

I suppose the better question is: Is it better to invest $10k over the next six months at the cost of owning a less enjoyable car, or better to wait six months and have a more enjoyable car for the rest of its life cycle?

Boofinator

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Re: Downgrading a car with positive equity?
« Reply #5 on: December 18, 2018, 02:29:23 PM »
I suppose the better question is: Is it better to invest $10k over the next six months at the cost of owning a less enjoyable car, or better to wait six months and have a more enjoyable car for the rest of its life cycle?

Kind of depends on your FIRE timeline. Let's assume ten years. That $10k is going to compound to $25k or so in ten years. That might be 3 months worth of working at that time (of course depends on your income and tax bracket). So ask yourself, is it better to have the sporty car or the extra time down the road? (You should also consider the intangibles that come with the sporty car: more money in gas, insurance, maintenance, etc.) Another way to ask it: Is future you going to thank you for the sports car thrills, or for earlier financial freedom? (There is no right answer.)

M5

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Re: Downgrading a car with positive equity?
« Reply #6 on: December 18, 2018, 02:34:32 PM »
I suppose the better question is: Is it better to invest $10k over the next six months at the cost of owning a less enjoyable car, or better to wait six months and have a more enjoyable car for the rest of its life cycle?

Kind of depends on your FIRE timeline. Let's assume ten years. That $10k is going to compound to $25k or so in ten years. That might be 3 months worth of working at that time (of course depends on your income and tax bracket). So ask yourself, is it better to have the sporty car or the extra time down the road? (You should also consider the intangibles that come with the sporty car: more money in gas, insurance, maintenance, etc.) Another way to ask it: Is future you going to thank you for the sports car thrills, or for earlier financial freedom? (There is no right answer.)

+1

Proud Foot

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Re: Downgrading a car with positive equity?
« Reply #7 on: December 19, 2018, 11:36:56 AM »
Thank you for all the responses!

I think what I'm really struggling with is I have a strong burning desire to reach FIRE as soon as possible, but I want to have something to enjoy along the way. The idea of treating yourself a little, but at the same time do I really need this enjoyment? It will take me approximately 6 months to pay this off completely on my currently salary, but I guess maybe I just want those 6 months back to be able to invest the money versus using it to pay off my car loan. I guess this goes deeper than just swapping out cars lol

I suppose the better question is: Is it better to invest $10k over the next six months at the cost of owning a less enjoyable car, or better to wait six months and have a more enjoyable car for the rest of its life cycle?

At 3% interest why not drop your payments back to the original amount and invest the rest? To have paid off over half of the purchase price in around a year you must be paying a decent amount above the minimum. You get to keep the fun car and are working towards your FIRE.

mschaus

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Re: Downgrading a car with positive equity?
« Reply #8 on: December 20, 2018, 11:37:10 AM »
Totally up to you if having the nice car is worth it, but for trying to build wealth, cars are usually one of the first big killers (transportation, housing, food, taxes).

HOWEVER, do not conflate having a car "paid off" with making good wealth-building decisions. Having a paid off car is not a reason to keep it, instead it actually makes it easier to sell. Your car is worth $23k now and will eventually fizzle down to zero. You can replace it with something worth much much less that fizzles to zero eventually, and save a bunch of money (and opportunity cost) in the process.

If you decide to scale back, sell it private party to get the best value. You'll have to pay off the loan first or conduct the sale transaction at the bank holding the title to get it all done in one step (buyer hands you cash, you hand over part of cash to banker, banker hands buyer the title).

Highly related: http://www.mrmoneymustache.com/2012/09/04/its-never-too-late-to-ditch-your-gas-guzzler/
« Last Edit: December 20, 2018, 11:40:33 AM by mschaus »

patchyfacialhair

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Re: Downgrading a car with positive equity?
« Reply #9 on: December 20, 2018, 11:58:42 AM »
I "downgraded" a couple years ago a 2000 Jeep Wrangler (worth at the time $10k) into a 2003 Toyota Camry (worth at the time around $3k).

While I miss the Jeep (it was my dream car), I too realized that it just wasn't practical.

No regrets. I still drive the Toyota every day, and on occasion I have used a family member's Wrangler in order to scratch the Jeep itch.

Just do it. It's just a car. I've also driven an STI, and while I would love one myself, could not justify the extravagance, despite a healthy dual income between my wife and I. We have found much better use for the money I was spending on the Jeep.