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First let's have a given to keep answers based purely on numbers, and away from opinions and advice on practicality:

  • I am financially irresponsible
  • I will get approved financing
  • Most importantly, my financially responsible spouse will approve it!

How do you compute for losses on an upside down trade-in of a car, for purchase of a new car?

Current car to trade-in:

  • Total of monthly payments made for 15-months: $8,505
  • Down payment made: $4,750
  • Trade-in value (estimated based on black book, 24,000 Km): $28,000
  • Total obligation (all-in incl. taxes, 5% interest, 84-months): $48,500 [this was 'day 1' total obligation]

New car to purchase:

enter image description here

Basically, I'm thinking like this:

  • I "sell" (trade-in) my car to the dealer for $28,000
  • However, I still owe the financing company $35,245 (48,500 total obligation, less 8,505 total payments already made, less 4,750 downpayment)
  • So $28,000 less $35,245 = ($7,245)

Meaning, trading in my current car, I immediately lose $7,245, not to mention I will start a new 84-month term. Is this correct?

  • what are you computing? – mhoran_psprep Aug 19 '16 at 14:52
  • Is your current car a lease? – CHendrix Aug 19 '16 at 16:20
  • You seem to be making the assumption that your entire payments have been paying down the value of the loan you have now. Some portion of that had been applied to interest on the loan. If your payments made so far are $8505 then some lesser amount has been applied to the loan. I haven't done the calculation but I would say about $6000 or so is in the ballpark. You are looking to take out a loan for nearly $10000 more than the new vehicle is worth. – homer150mw Aug 20 '16 at 13:51
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Numbers: Estimate you still owe around 37000 (48500 - 4750, 5% interest, 618 per month payment).

Initial price, down payment, payments made - none of these mean anything.

Ask your lender, "What is the payoff of the current loan?" Next, sell or trade the current vehicle. Compare to the amount owed. Any shortfall has to be repaid, out of pocket, or in some cases added to the price of the new car and included in the principal of the new loan. You cannot calculate how much you still owe the way you have, because it totally ignores interest.

Advice on practicality: Don't do this. You will be upside down even worse on the new car from the instant you drive off the lot. Sell the current vehicle, find a way to pay the difference - one that doesn't involve financing. Cut your losses on the upside down vehicle. Then purchase a new vehicle. I'm in the "Pay cash for gently used" school, YMMV.

Another option is to go to your bank. Refinance your car now to get a lower interest rate. Pay as much of the principal as you can. Keep that car until it is paid off. Then you will not be upside down.

If you're asking how to use the estimator on the webpage. Put the payoff in the downpayment as a negative and the trade in value in the trade in spot. Expect the payment to go up significantly.

Another opinion that might be practical advice. Nothing we say here will convince your financially responsible spouse that this is a good idea.

  • Called the lender, "What is the payoff of the current loan?" Answer: $34,000 as of day of phone call. Went to car dealer, "What is the trade-in value of my current car?" Answer: $29,000. Therefore, I need to add $5,000 on top of whatever new car I want to buy from the car dealer. – Silver Dollar Aug 24 '16 at 17:40
  • Yep. Though be careful with trade-in values. Going to a used car dealer and asking what they'll give you in cash is a better measure of the actual cash value of the car. (The new car dealer will give you more trade-in on one hand and raise the price of the car you're buying with the other). And if you add the shortfall to the new car financing package, then when you drive off the lot you'll be 10k upside down before you can blink. (Assuming a 5k instant depreciation when you buy the car). – Xalorous Aug 24 '16 at 22:26
  • When you're buying a car, get an approved loan from your bank, and get a quote on how much the friendly internet based used car lot (you know the ones on TV all the time) will pay you for your car. When you go to the dealer, do not discuss financing or tradein. Stick to the bottom line. If they try to corner you, tell them you only want to talk about the purchase price. Settle on that. THEN get solid numbers on trade-in and financing. If they can't match your bank on interest rate, don't get their financing. If they can't match the car lot price, don't do the trade-in. – Xalorous Aug 24 '16 at 22:34
  • Research 'four square' sales for more information on how they move the numbers around so you think you're getting a deal. – Xalorous Aug 24 '16 at 22:35
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I think you are making this more complicated that it has to be. In the end you will end up with a car that you paid X, and is worth Y. Your numbers are a bit hard to follow. Hopefully I got this right.

I am no accountant, this is how I would figure the deal:

The payments made are irrelevant. The downpayment is irrelevant as it is still a reduction in net worth.

Your current car has a asset value of <29,500>. That should make anyone pause a bit.

In order to get into this new car you will have to finance the shortfall on the current car (29,500), the price of the vehicle (45,300), the immediate depreciation (say 7,000). In the end you will have a car worth 38K and owe 82K. So you will have a asset value of <44,000>. Obviously a much worse situation.

To do this car deal it would cost the person 14,500 of net worth the day the deal was done. As time marched on, it would be more as the reduction in debt is unlikely to keep up with the depreciation.

Additionally the new car purchase screen shows a payment of $609/month if you bought the car with zero down. Except you don't have zero down, you have -29,500 down. Making the car payment higher, I estamate 1005/month with 3.5%@84 months.

So rather than having a hit to your cash flow of $567 for 69 more months, you would have a payment of about $1000 for 84 months if you could obtain the interest rate of 3.5%.

Those are the two things I would focus on is the reduction in net worth and the cash flow liability.

I understand you are trying to get a feel for things, but there are two things that make this very unrealistic. The first is financing. It is unlikely that financing could be obtained with this deal and if it could this would be considered a sub-prime loan. However, perhaps a relative could finance the deal.

Secondly, there is no way even a moderately financially responsible spouse would approve this deal. That is provided there were not sigificant assets, like a few million. If that is the case why not just write a check?

  • 1
    Shouldn't we less the (payments already made + downpayment) from the total obligation of 48,500? Sorry I wasn't clear on saying 48,500 was total obligation from the start of the purchase. – Silver Dollar Aug 19 '16 at 17:23
  • I mean, wouldn't it be like this: I get $28,000 for selling my current car, but still owe $48,500 less $8,505 less $4,750 to it? Therefore, my downpayment/tradein value for the new car will be $28,000 less $35,245 = ($7,245) ? – Silver Dollar Aug 19 '16 at 17:32
  • Not with the downpayment. It is still a reduction of net worth, so it is irrelevant to my calculations. I read the total obligation as the current loan balance, so some part of the payments should be applied to principle. To be accurate we need the current loan balance. Good find sir! – Pete B. Aug 19 '16 at 17:33
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I'm going to ignore your numbers to avoid spending the time to understand them. I'm just going to go over the basic moving parts of trading an upside down car against another financed car because I think you're conflating price and value. I'm also going to ignore taxes, and fees, and depreciation.

The car has an acquisition cost (price) then it has a value. You pay the price to obtain this thing, then in the future it is worth what someone else will pay you.

When you finance a car you agree to your $10,000 price, then you call up Mr. Bank and agree to pay 10% per year for 5 years on that $10,000. Mr. Banker wires over $10,000 and you drive home in your car.

Say in a year you want a different car. This new car has a price of $20,000, and wouldn't you know it they'll even buy your current car from you. They'll give you $7,000 to trade in your current car.

Your current car has a value of $7,000. You've made 12 payments of $188.71. Of those payments about $460 was interest, you now owe about $8,195 to Mr. Banker.

The new dealership needs to send payment to Mr. Banker to get the title for your current car. They'll send the $7,000 they agreed to pay for your car. Then they'll loan you the additional $1,195 ($8,195 owed on the car minus $7,000 trade in value).

Your loan on the new car will be for $21,195, $20,000 for the new car and $1,195 for the amount you still owed on the old car after the dealership paid you $7,000 for your old car.

It doesn't matter what your down-payment was on the old car, it doesn't matter what your payment was before, it doesn't matter what you bought your old car for. All that matters is how much you owe on it today and how much the buyer (the dealership) is willing to pay you for it.

How much of this is "loss" is an extremely vague number to derive primarily because your utility of the car has a value. But it could be argued that the $1,195 added on to your new car loan to pay for the old car is lost.

  • I can confirm to you what is not a loss. Mr. Dealer and Mr. Banker did not lose money at any point in this scenario. – Xalorous Aug 24 '16 at 22:55

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