How to compute for losses in an upside down trade-in of a financed car?

Question

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:

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?

Answer 1

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.

Answer 2

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?

Answer 3

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.