Author Topic: Sell Car with Loan or Keep?  (Read 10799 times)

khotte

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Sell Car with Loan or Keep?
« on: October 12, 2013, 12:51:51 PM »
I bought my 2009 Honda Accord in June of 2012. I paid $20k for the car and currently have $13k left on the loan. After becoming an avid reader on MMM, I want to sell my car but I feel like I shouldn't. I'm seeing there are 2 options:
  • Continue to pay off the car until December of 2015 and then sell it for $10k and buy a cheaper used car (without a loan this time). Essentially I've paid $10k to use the car for 3.5 years. ($2850/year)
  • Sell my car now for $13k and break even on the loan. It would then have costed me $7k to have the car for 1.5 years ($4666/year)
By this math, I'm thinking I should choose option A and keep my car until it is paid off. Then buy a used car without a loan. Am I thinking about this in the wrong way? Should I just sell my car now and buy a used car without a loan? Thanks!

shelfins

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Re: Sell Car with Loan or Keep?
« Reply #1 on: October 12, 2013, 02:40:53 PM »
There's a few other things to consider here:

1. What's your monthly payment and the interest rate on the loan? If the car cost $20k and you have $13k left on the loan, you've actually paid more than $7k so far, because you've also been paying interest. Likewise, if you keep the car for the next two years, only part of your monthly payments will go towards actually paying down the money you owe on the car, and the other part will go towards paying interest on the debt.

2. What's the Kelly Blue Book value for your car? (Go to www.kbb.com to find out.) I'm not sure if you're saying you can sell it for $13k now because that's the best price you can get for it, or because that's what you owe on the loan. Depending on the exact style and how many miles you have on it, you may well be able to sell it for more. To estimate how much you can sell it for in two years, estimate how many miles you'll have on it then, and look at the prices for cars with that many miles that are two years older than your car.

3. Most importantly, how much will the cost per year be for any new car you buy? For example, let's say that you buy a used car with cash for $7,000 and estimate that you'll be able to drive it for seven years, then sell it for $3,500. That means your cost per year for that car will be $500 per year. So, assuming your original calculations about your current car are right, if you stick with your current car, you will have spent $7,000 for the last 1.5 years, then $1500 on the car next year, another $1500 on the car the following year, and then $500 every year after once you buy a used car. Instead, if you sell your car now, you will have spent $7,000 for the last 1.5 years, then $500 next year, then $500 the following year, then $500 every year after. When you write it out this way, you can see that what you've already spent doesn't really matter--it's just how much it will cost to own your current car for the next two years, and whether that's more or less than it would cost to own a used car for the next two years. Does that make sense?

khotte

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Re: Sell Car with Loan or Keep?
« Reply #2 on: October 12, 2013, 04:48:20 PM »
Thanks so much for your response. I've answered a couple of your questions to help in the decision.
  • I just refinanced my loan down from 6% to 2.64%. I have a monthly payment of $300.
  • I've KBB'ed my car and I believe I can sell it for $13k today, or $10k in two years.
  • This definitely makes sense. Essentially it's like I took a loan out for a $13k car instead of buying a used car for for $7k.
A couple of points to consider as well. I just graduated in Spring of 2012 and I'm currently putting all of my extra income of $1900k/month on my student loans which are at an average of 7.35%. My goal is to pay those off ASAP. Therefore, besides my emergency fund of $1k, I don't have any money to buy a used car for $7k. If I wanted to get one, I would have to sell my car and break even on the loan, then get another loan for the $7k of a used car. Any advice on what to do? Thanks!
« Last Edit: October 12, 2013, 04:52:38 PM by khotte »

shelfins

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Re: Sell Car with Loan or Keep?
« Reply #3 on: October 13, 2013, 02:17:41 PM »
Ah, OK, that does make things more complicated. If cars cost the same amount from a dealer as on Craigslist, then it would be simple. I would recommend selling your car right away, and financing a less expensive, more fuel-efficient car at the 2.64% interest rate. This is a clear win over your current situation, since you'll be paying interest on a smaller amount of principal, so the total amount you pay in interest to the car company will be lower, plus you'll have a smaller car payment each month, so you can redirect the difference to paying off your higher-interest rate student loans even faster.

What makes it tricky is that it typically costs about $1300-1500 less to buy a car directly from the owner than buying an equivalent car through a dealer, and buying directly from an owner generally requires paying in cash. (For example, a 2009 Toyota Yaris in excellent condition has a KBB of $8691 for a private party sale, but $10,016 through a dealer) Normally, this is a win-win, because you'd want to pay in cash anyway so you don't throw away money in interest, but because of your student loans, for you, paying in cash is equivalent to borrowing the money at 7.35%. So, which is better? Borrowing for the car at 2.64%, or borrowing for the car at 7.35%, but paying $1300 less? The short answer is that it depends how long you're going to be borrowing the money for. The break-even point for $10,000 at 2.64% vs. $8,700 at 7.35% is somewhere between 6 and 7 years, with shorter terms favoring the lower principal, and longer terms favoring the lower interest rate. You don't say exactly how much you owe on your student loans, but given the huge amounts of money you're throwing at them (awesome job, by the way!), you're probably going to have paid them back in considerably fewer than 6 years, so you may be better off paying cash rather than financing. This would basically involve paying only the minimum on your student loans for four or five months to save up the cash to buy a car on craigslist.

Of course, there is one other option, the one you mentioned in your original post--keep the current car until you've paid off your student loans and saved enough to buy a car in cash and then sell it and buy the used car. So how to decide between these two?

If you keep your current car and buy a 2009 Yaris once you've paid off your student loan, the total cost of the Yaris would be the total you'll pay in car payments until you pay off the student loans, plus the cost of the Yaris at that time, minus the difference between the selling price of your Accord and the amount you'll owe on the car loan at the time. So, for example, if you could pay off your student loans in two years, you would pay $7200 in car payments on the Accord, a 2009 Yaris would probably cost $6000 at that point, your Accord would be worth $10000, but you'd only still owe $6300. So you'd net $3700 on your car sale, for an additional out-of-pocket cost for the car of $2300, or $9500 altogether.

If instead you save up now for the car, imagine it as if you if you were paying your student loan payments as usual, but instead were taking out $1910 loans each month for the next 4 months at 7.35% so you have enough to pay for the car. Of course, you'll be continuing to make payments on your Accord as well during this time. You'd sell the car, net a small profit (by this point, it should only be worth $12,667, but you'll only owe $11,910), and buy the 2009 Yaris with the "loan" plus the sale profits, which will only cost $8400ish at this point. Then you pay the $7640 loan back at $300/month (the $300/month you were directing to your car payments before--in reality, this will mean you'll be paying $2200 towards your student loans). You will pay off your "student loans" after 2 years (during which time you will have spent the same $7200 in car payments), and still owe $2064 on the "car loan", which you would then pay off the following month. Note that this means you'll pay $7200 + $2300 if you switch later, and $7200 + $2064 if you switch now.

So, basically, as best I can figure, if you have two years left to pay off your student loans, you'd get a net savings of a couple hundred dollars from saving up and buying the car now rather than later. Of course, it will be different if you have more or less time left on your student loan, and obviously there are a lot of assumptions I'm building into the model, so I'd be tempted to call it more or less a wash and it just comes down to which car you'd rather have for the next two years. Of course, if you drive much at all, the difference in mileage alone (31mpg vs 24mpg) will save you a ton of cash (If you drive 31 miles a day and gas is $3.00 a gallon, you'll be spending $3.00 on gas a day instead of ~$4, for a total gas savings of $730 over the two years). So that plus a small cost savings on the car itself would lead me to favor buying the car now rather than later.

Let me know if you have any questions about what I did, or if any of my assumptions were way off (about how expensive of a car you want to buy, or how much more you actually owe on your student loans). Also, to make it not crazy hard to calculate, I assumed that all of your student loans are at 7.35%, as opposed to some at higher rates and some at lower rates. I can imagine situations where it would make a difference (for instance, if you have two more months to pay off the last of your 12.5% loan and then everything else is at 5% and below, I'd guess you'd want to pay off the high rate loan first and then save up for the car), but I didn't consider any of that. Hope that helps!

Self-employed-swami

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Re: Sell Car with Loan or Keep?
« Reply #4 on: October 13, 2013, 02:39:53 PM »
Sell it now, pay off the loan, buy a cheaper car with cash.  Sunk costs are sunk costs, there is no point in trying to justify keeping it because lower a yearly operating cost, because you keep the car longer, and spend even more money on it.

khotte

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Re: Sell Car with Loan or Keep?
« Reply #5 on: October 13, 2013, 02:58:11 PM »
Thanks so much shelfins! That makes sense. To answer your question, I have $41k left on my student loans and my goal is to have them paid off in 2 years. One loan is $24k at 7.9% and the other is $17k at 6.55%. I was looking into a Gen II Pruis (2004-2009) around $9k private party. Does this change your recommendation? Thanks!

Self-Employed Swami, if I sell my car and pay off the loan, how do I buy a car if I don't have extra cash? I'm using all of my extra income to pay off my student loans. Would you recommend not paying extra to my loans and saving up cash? Also, I have an emergency fund of $1k that I'd rather not tap into if I don't have to. Thanks!

Self-employed-swami

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Re: Sell Car with Loan or Keep?
« Reply #6 on: October 13, 2013, 03:54:43 PM »
Sounds like maybe you'd be better off going carless until your loans are gone, then saving up cash to buy a used car in the $5000 range.

Can you walk/bike/take transit?

shelfins

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Re: Sell Car with Loan or Keep?
« Reply #7 on: October 13, 2013, 03:55:32 PM »
No, that sounds like it should work out very similarly since the whole loan is pretty close to 7.35%, and a $9000 Prius is pretty close in price to the $8700 Yaris I used. The only difference is that you'll save even more money on gas in the 1.5-2 extra years you'll have the car if you buy it sooner rather than later. :)

onehappypanda

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Re: Sell Car with Loan or Keep?
« Reply #8 on: October 13, 2013, 05:42:11 PM »
Your original math is based on sunk cost - it doesn't matter what the car cost you in the past because that money is gone. The numbers you want to run is how much keeping it vs. replacing it is going to cost you in the future.

I guess I'll be the voice of dissent a little bit: If you intend to turn around and get another car loan, I'm not sure that selling is going to help you. You'll still be paying interest, albeit on a cheaper car. But every time you purchase a car at a dealer, you're paying a bundle in taxes and fees, as well as the dealer's markup. They have to profit somehow, naturally. Unlike buying a car in cash, you won't be saving on car insurance either.

So if you sell your car and come out even, then turn around and finance another car, will the amount you save on gas and a slightly smaller payment be worth the dealer markup, taxes, fees, and interest of getting another financed car? It might be if there were a huge price differential between what you owe now and what you would be buying, but run the numbers to be sure. Right now you owe $13K, if you bought a cheaper used car for $10K and then added on $1-2K in dealer taxes and fees, are you saving that much?

Even if you buy private party, you'll be paying tax on the purchase. Plus getting a loan for a private party car may come with a higher interest rate, though I guess that depends on the vehicle and who is financing it.

Do the math and keep all the factors (original price, taxes and fees, interest, and insurance) in mind, is my point. Some other options to seriously consider:
1. Sell the car, and go without a car for awhile. If this is at all possible (travelling via bus/bike/etc) then it would obviously be your best option financially. You can then take that money and save up for an old car, or pay off loans, or do whatever you need to do. This can be inconvenient for a bit, but it can pay off in the long run.

2. Sell the car, and buy a beater (like $1-2K) in cash. So it might not be as reliable, but if you keep $500 on hand at any given time and brush up on your car maintenance skills, you can keep it rolling. You would saves hundreds every month in car payment and interest alone, which is money that could go toward your student debt. You also won't be tempted to drive it as much, which can be more motivation to start/keep biking.

Self-employed-swami

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Re: Sell Car with Loan or Keep?
« Reply #9 on: October 13, 2013, 08:08:27 PM »
I like Panda's second suggestion if you must have a car.  There should be a few 2000-2002 Toyota Echos out there, that will run for a good long time, and be available in that price range.  I just sold my 1995 Tercel that had 290,000km on it, and it ran without issue for me, for the 6 months I owned it.  I paid $575 for it, and other than one oil change, and a pint of transmission fluid, cost me nothing in maintenance.

khotte

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Re: Sell Car with Loan or Keep?
« Reply #10 on: October 14, 2013, 04:30:59 AM »
Thanks everyone and I'm seeing now that the math was based on sunk costs. I wish I could go without a car but I have very cheap rent now, and only live 9 miles from work. So is the recommendation is to sell my car now, and buy something extremely cheap ($1k to $2k) to last me until my loans are paid off? How many miles should the car have that I'm looking for?

Also, once my loans are paid off should I then save for another car? Thanks everyone!

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Re: Sell Car with Loan or Keep?
« Reply #11 on: October 14, 2013, 05:17:08 AM »
Not sure why you need a car.  Looks like you live in Orlando (flat? with mild weather) and are a very bikeable 9 miles from work.  If I were you, I would seriously challenge the assumption that you "need" a car.

khotte

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Re: Sell Car with Loan or Keep?
« Reply #12 on: October 14, 2013, 05:23:14 AM »
The problem with Orlando is that my office is the only thing that's 9 miles away. Everything else is 20 miles away. Nothing in Orlando is very close (except Disney). I'm not ready at this point in my life to not have a car. When I move from this location, I'll definitely be looking at being closer to everything and biking much more.

lackofstache

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Re: Sell Car with Loan or Keep?
« Reply #13 on: October 14, 2013, 07:01:42 AM »
Thanks everyone and I'm seeing now that the math was based on sunk costs. I wish I could go without a car but I have very cheap rent now, and only live 9 miles from work. So is the recommendation is to sell my car now, and buy something extremely cheap ($1k to $2k) to last me until my loans are paid off? How many miles should the car have that I'm looking for?

Also, once my loans are paid off should I then save for another car? Thanks everyone!

I agree that this makes sense. Sell your car and buy cheap (just save a few months of paying down your Student Loans for later).

As far as saving for a car once your loans are paid off, that'll be a question for yourself in ~2 years. Maybe you'll want a newer car, maybe not. I imagine that once you're out of debt, you won't be eager to obtain any again, so you'll probably save and buy with cash.

ioseftavi

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Re: Sell Car with Loan or Keep?
« Reply #14 on: October 14, 2013, 09:01:02 AM »
The problem with Orlando is that my office is the only thing that's 9 miles away. Everything else is 20 miles away. Nothing in Orlando is very close (except Disney). I'm not ready at this point in my life to not have a car. When I move from this location, I'll definitely be looking at being closer to everything and biking much more.

That's ok - use a bike for your daily commute, and get a zipcar for longer stuff.  Seriously, you did good by moving within 10 miles of work.  That translates to a  30 minute commute on bike.  DO IT.  The amount of money you will save can roughly be classified as "stupid crazy money", and you'll be able to kill your loans that much faster.  DO ITTTTTTTTTTTTTTTTT.


khotte

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Re: Sell Car with Loan or Keep?
« Reply #15 on: October 15, 2013, 07:26:07 PM »
Thanks everyone for the input! I've decided to pay the minimums on my school loans for 3 months while I save up for a $5k car. As soon as I've saved enough money, I'll sell my current car and buy the new used one! Then I'll go back to paying $1900 on my loans PLUS the $300 I was paying for my car. I'll also be putting the savings from gas and insurance ~$50/month on the loans as well! Thanks for everyone's help!

khotte

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Re: Sell Car with Loan or Keep?
« Reply #16 on: October 22, 2013, 05:53:11 PM »
Okay sorry to bring up this post again, but what if I can't sell my car? I went to Carmax and they offered me $11,500 and I still owe $13k on the loan. What should I do if I can't sell my car?

Bruised_Pepper

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Re: Sell Car with Loan or Keep?
« Reply #17 on: October 22, 2013, 05:56:12 PM »
Okay sorry to bring up this post again, but what if I can't sell my car? I went to Carmax and they offered me $11,500 and I still owe $13k on the loan. What should I do if I can't sell my car?

Try selling private party.  I don't have much experience in car selling, but just remember that Carmax is going to flip it for resale, so they'll probably lowball you. 

khotte

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Re: Sell Car with Loan or Keep?
« Reply #18 on: October 22, 2013, 05:58:27 PM »
I already have my car listed on Craigslist and Autotrader but I haven't gotten any hits yet. I just wanted to bring it to Carmax to get a baseline offer. No way I'm selling it to them AND having to pay off the balance of my loan!

Fuzz

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Re: Sell Car with Loan or Keep?
« Reply #19 on: October 22, 2013, 07:19:17 PM »
I have very limited experience with buying and selling cars person to person in the 10k to 12K range. My gf did it, and it's hard. Lots of people will kick the tires, take it for a drive and then lowball you. Also, lots of people will want to pay you with a check, which you shouldn't accept. Make them get you a money order at the bank while you watch; or better yet pay cash and do the transaction at your bank so you can go inside.

In my experience, KBB is high for what you can get on Craigslist. I would not pay near KBB prices. Also in my experience the longer you're selling on CL, the more you're ready to settle at the end.

Yes, you probably spent way, way too much on a car. But you're 23 and going to have your S/Ls paid off in 2 years, and are saving $1900 a month! Wow! You're in terrific shape. You really are. You're set up to put a firehouse of money into the stock market in your 20s, which is huge for ER.

If you work it out and think you can net more than $1000 on switching to a cheaper car at this point, I would go for it. But just recognize that it's a huge hassle with a lot of transaction costs. You'll want to get a good deal on the car you buy, and get a good deal on the car you sell. That's not easy. You're going to be dealing with strangers, who are not reliable and have unrealistic expectations. I would guess that if you estimate you'll come out a $1000 ahead, when the cash changes hands it will be less than that because you'll end up selling for less than you want and buying for more than you want. At least that's been my experience. YMMV. Also, don't forget you'll pay sales tax and registration on whatever car you buy, etc.

Good luck.


chasesfish

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Re: Sell Car with Loan or Keep?
« Reply #20 on: October 23, 2013, 04:53:15 AM »
It's time for me to get tarred and feathered, but your not driving that horrible of a car.  It's probably close to 30mpg.  It's the taxes, insurance, ect that are a little painful at that value, but it should start going down in a year or two. 

Have you looked at ways to increase your income?  It sounds like things are a little tight to not have the ability to come up with a $1500 pay down on the car.

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Re: Sell Car with Loan or Keep?
« Reply #21 on: October 23, 2013, 07:25:37 AM »
I would look at Nadaguides and Edmunds TMV to give you a realistic expectation between the 3 sites of what your car is worth.  Depending on the condition, Carmax doesn't necessarily lowball you if you are bringing in a car that is people will want to buy.  People like hondas, and like accords, and probably wouldn't be too hard to sell one.  The usually offer about 1-1.5k below what you could try to sell it for privately, and are usually very upfront about that.  Then they will try to make a 1500 profit on it at least.   But YMMV.  Carmax makes the process simple, but you pay for that simplicity.  Always good to have an offer from them when you are ready to sell, at least you know what they will pay and can try to get more from private party.

khotte

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Re: Sell Car with Loan or Keep?
« Reply #22 on: October 23, 2013, 09:36:28 AM »
I understand that trading in my car will yield a lower value than selling it private party. That's why I'm trying to sell it private party first, so I can get more money. My question is if I can't sell it private party, do I just take it to Carmax again and sell it to them? Or should I continue to pay $300/month on the car and keep it?

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Re: Sell Car with Loan or Keep?
« Reply #23 on: October 23, 2013, 09:45:10 AM »
I would sell it to carmax, pay the difference to the finance company, and take it as a lesson, if you can't find a private buyer in the next 45 days or so.

Again, you are confusing sunk costs (what you've already paid), with ongoing costs (continuing to make car payments, insurance and gas).

TygerTung

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Re: Sell Car with Loan or Keep?
« Reply #24 on: October 24, 2013, 12:17:21 AM »
You could get a 50cc honda scooter, or a small motorbike that you could use for going shopping etc 20+ miles away and bicycle other than that.