Author Topic: The math behind replacing a financed car  (Read 3274 times)

FunSizedStash

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The math behind replacing a financed car
« on: December 12, 2016, 07:05:09 PM »
After reading some of the MMM posts (I started with the first post and am still making my way through) I started thinking about selling my current car (I would need to replace it with a used car, but maybe not right away).  I was hoping that someone here could help me with understanding the reasoning and the math, without punching me in the face too hard.

Letís start with the bad newsÖ I financed 100% of a new car.  From reading the blog, I know that it was a stupid decision.  But I would like the numbers to help me understand just how stupid it was.

Here are the stats:
Car:               2015 Hyundai Accent GLS
Amount Financed:         18,266.55
Principal Balance (as of 12/11/16):   14,001.97 (which is way more than the car is worth)
Monthly Payment:         332.70
Interest Rate:            3.49%

Hypothetically, if I sell the car for $9000, Iíd still owe about $5000, which I could pay, but thatís nearly all my savings at this point.  Between my car payment, car insurance, taxes/registration, and gas, my average monthly car spending is around $500 (so Iíd make up the $5000 in 10 months if I went carless).  This doesnít count maintenance costs (Iím unsure how to compare maintenance on my current car to what I would need on any used car that I get.  I have not yet learned how to maintain my own car, so for the sake of comparing the new car to a used one, letís assume I would still take it somewhere for the maintenance.)

Now that Iím typing this, it doesnít seem like Iíd be able to afford buying a used car outright (depending on what I get).  But Iím hoping you guys will be able to prove me wrong.  Iím not too picky about the next car I get; Iíd like something reliable (to help avoid maintenance costs) with good gas mileage.

Even though I feel like I put a lot of information in here, Iím sure that there is probably other information that is necessary, so I welcome any questions you have.

Thank you for any help you can give me.  I really appreciate it.


FerrumB5

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Re: The math behind replacing a financed car
« Reply #1 on: December 12, 2016, 07:12:00 PM »
You must be joking. A new Accent cost 18+k in 2015? Impossible

SwordGuy

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Re: The math behind replacing a financed car
« Reply #2 on: December 12, 2016, 09:59:59 PM »
Ok, so you are cash poor when it comes to getting out of the hole.

Owe:  $14,000
Sell: +$  9,000
Buy:  -$  3,000
===============
New Debt: $8,000

If you buy from a dealer you may be able to roll it into a new loan.

Monthly payments would decrease, especially if you can keep the interest rates the same or lower.

Insurance payments would also drop as this would be an older car that's worth much less. 

Maintenance costs would be higher, so I would assume the insurance and maintenance would be a wash.

Alternatively, you could buy one from an owner for $1000 and drive it until it dies.   If it would cost more to fix than another $1000 car, buy another car and sell the old one.

If you have access to credit to cover the fact that you've drained your emergency fund - and your employability is pretty stable - you could pay off the old one in cash and save up the $5000 in about a year.  Otherwise a car breakdown early on would leave you without a car and without the money to fix it.

Here's a plan for moving forward from that point:

http://www.daveramsey.com/blog/drive-free



SwordGuy

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Re: The math behind replacing a financed car
« Reply #3 on: December 12, 2016, 10:13:45 PM »
I could quibble with some of the numbers in the Ramsey video, but the general principle is correct.   (Forgot to add that.)

Bruinguy

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Re: The math behind replacing a financed car
« Reply #4 on: December 12, 2016, 10:21:25 PM »
Selling the car, even though you on more than it is worth, works if the value of your current car is more than the replacement car you would buy. If so, then you can apply the difference to reduce your overall debtI which is a good thing.



Metric Mouse

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Re: The math behind replacing a financed car
« Reply #5 on: December 13, 2016, 05:52:13 AM »
You must be joking. A new Accent cost 18+k in 2015? Impossible

Sticker price + tax, title and license could be close... I'm just impressed they depreciate 50% after a year; I wouldn't have thought that was likely.

NoStacheOhio

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Re: The math behind replacing a financed car
« Reply #6 on: December 13, 2016, 08:47:14 AM »

Stash Engineer

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Re: The math behind replacing a financed car
« Reply #7 on: December 13, 2016, 09:17:54 AM »
https://thegarage.jalopnik.com/how-do-i-buy-a-car-when-im-upside-down-on-my-current-lo-1638064679/

Couple options, some more mustacian than others.

I never would have considered leasing to get out from being underwater.  Interesting idea.

frugaliknowit

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Re: The math behind replacing a financed car
« Reply #8 on: December 13, 2016, 09:19:55 AM »
Since this already IS a basic car, has ALREADY taken a huge depreciation hit, and you are cash poor, I would cut all discretionary expenses to the bone and beat the crap out of this loan and NO MORE FREAGIN BORROWING going forward.

NoStacheOhio

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Re: The math behind replacing a financed car
« Reply #9 on: December 13, 2016, 10:55:19 AM »
https://thegarage.jalopnik.com/how-do-i-buy-a-car-when-im-upside-down-on-my-current-lo-1638064679/

Couple options, some more mustacian than others.

I never would have considered leasing to get out from being underwater.  Interesting idea.

Yeah, it's outside the box. You need decent credit, but it has the possibility of working out in your favor. It's not for everyone, or every situation.

Slurgi

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Re: The math behind replacing a financed car
« Reply #10 on: December 13, 2016, 11:29:39 AM »
Yikes. Given that the car sells for $9,000 (has it really lost that much value?), I don't know that the potential loss in the transactions from selling your current car and buying a new one would be worth it. Not to mention the time and effort spent doing so.

If you had a Jeep or a Hummer or something obscenely expensive and impractical, that'd be a different story. But without knowing the specifics of your financial situation, at this point I'd consider just hanging onto it and considering it a lesson learned.

Take good care of it and make it last many years, and it won't really amount to that huge of a difference in the end.

Metric Mouse

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Re: The math behind replacing a financed car
« Reply #11 on: December 13, 2016, 11:37:57 AM »
Yikes. Given that the car sells for $9,000 (has it really lost that much value?), I don't know that the potential loss in the transactions from selling your current car and buying a new one would be worth it. Not to mention the time and effort spent doing so.

If you had a Jeep or a Hummer or something obscenely expensive and impractical, that'd be a different story. But without knowing the specifics of your financial situation, at this point I'd consider just hanging onto it and considering it a lesson learned.

Take good care of it and make it last many years, and it won't really amount to that huge of a difference in the end.

Yeah, I looked it up - looks like fair value is $9k-$10K.

In my area Jeeps hold their value pretty well. I've been looking for a nice used one to clean up and cart around in once the kiddo is out of carseats in a few years - yikes at the prices they want.

MrsPete

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Re: The math behind replacing a financed car
« Reply #12 on: December 13, 2016, 12:49:27 PM »
Yeah, you screwed up, but done is done.  You already own the car, and selling it now doesn't look like it'll fix things.  You'll still owe money, AND you won't have use of the car.  I think your best bet is to keep the car and pay a little extra every month (to cut down on the interest).  Take good care of it so it'll last you a while.  Drive it 'til it just won't go any more; each of our cars has seemed to last about two years after we started saying to each other, "It'll be dead in another month or so." 







skeptic

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Re: The math behind replacing a financed car
« Reply #13 on: December 13, 2016, 12:51:46 PM »
There's more than one reasonable answer, but I lean toward what Slurgi has suggested: just hold onto it at this point and pay it off.

Here's why:

The reason not to buy a new car is the massive depreciation.

The reason not to finance it is the interest and fees (and also, perhaps, because you won't be able to negotiate the very best price).

Well, you've already taken most of the hit for depreciation. Sure, there will be some more depreciation in the next few years, but it could be more or less on par with what you'd experience with whatever used car(s) you might buy. You can't get that money back... so don't sweat it, just learn from it.

As for the interest and fees, you'll never get back the fees (if any) or the first year's interest. However, because the rate is fairly low and the term of the loan is only 5 years, you aren't going to pay massive amounts of interest. I'd estimate you have about $1000 left in interest payments. By all means, pay down the loan sooner if possible to avoid paying that interest. But you don't seem to have any other options that save you that interest except ones involving buying a probably unreliable car and/or depleting your emergency fund.

At least you know the ownership history of your car and can take care of it. You've paid (dearly) for that benefit, and you won't get the money back... you might as well use it.

neo von retorch

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Re: The math behind replacing a financed car
« Reply #14 on: December 13, 2016, 01:05:39 PM »
If you keep the car, you can do a few things to cut down future costs:

1) Try to minimize driving.
2) Learn the basic maintenance items first (oil change is pretty simple; hardest part is opening the drain plug and avoiding a mess - consider latex gloves to avoid contact with oil.)
3) Pay off your loan as fast as you can. Interest rate is NOT HORRIBLE but you might consider dropping collision insurance once the loan is paid off.

Something else you might want to do is disconnect your loan from your car in your head.
You bought the car for $18,000, and it's worth maybe $10,000. I'll make some assumptions, and you can correct them, but let's say you bought the car in May 2014 and drive a fairly typical 12,000 miles per year. So 30,000 miles and depreciation alone has already cost you $0.267 / mile which isn't completely awful (but a used car can get you in the $0.05 / mile range!) You can't fix that now, but your car will not depreciate even remotely as much going forward.

So there's the loan - it's gobbling up your cash flow and costing you $41-42/month. That cash flow is pretty important for paying off other debts, building up savings, and later investing, so of course you want to pay that down as fast as you can. But again, you don't have to associate it in your mind with your car. Since you're underwater, selling the car is probably not the most efficient way to reduce that debt. Just focus on it, prioritize it, put it before any kind of spending that you can.

FunSizedStash

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Re: The math behind replacing a financed car
« Reply #15 on: December 13, 2016, 05:33:25 PM »
Thank you to everyone who commented (and those who may still comment).

I think at this point, I will hold on to the car.  I may revisit the idea of selling it after I either save more money or have a smaller negative equity. 

I definitely consider this a lesson learned, and I will not be financing any other cars once I get out of this debt.

Just Joe

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Re: The math behind replacing a financed car
« Reply #16 on: December 14, 2016, 08:57:44 AM »
Drive it 200K miles. Use quality replacement parts when something breaks. Use quality oils and filters. Put quality tires on it if you want a smooth highway ride. Look around the web to find a Hyundai specific owner enthusiast website that can guide you when it breaks. I assume that there are Hyundai dealers who sell new OEM parts on line. Find one.

I drive a different brand and those OEM parts can be had for prices similar to the "good" aftermarket parts. In my case OEM is always better than aftermarket. Better materials or quality control.