One in five buyers of new cars is being financially dishonest.
That’s my takeaway from a recent report from car data firm Edmunds.com that found 20% of people who bought a new car in the third quarter of 2023 and traded in their existing car, still owed money on the car loan for the car they already owned, even after getting the trade-in value.
That is what is known as being “underwater”, “upside-down” or having “negative equity”. And it’s not typically a small sum. Edmunds says the average negative equity for people with car loans is more than $6,000 these days.
The fact that you owe more on a car loan than the car’s current (depreciated) market value is not ideal, but it is not necessarily a huge problem. If you continue to make on-time payments you will eventually get to the point where even before the loan balance is paid off, what you owe will be less than the market value of the car.
My problem is if you are upside down and you decide to buy another car and roll over the unpaid loan balance on the old car into a new loan for the new car. This is where I think you are drifting into the financially dishonest lane.
As we have talked about plenty, a car may be a necessity, but it is nonetheless not a good investment. You will never recoup the cost of what you paid. Especially if you used a loan to finance the purchase. The goal should always be to pay the least amount possible to meet your need for a car. If you intend to take out a loan, it is beyond dishonest to buy the more expensive car that you want and not the car that you need that will cost you less.
And the fact that so many people buying new cars are trading in a car with negative equity is doubling down on a financial mistake. The goal is to get a car loan paid off ASAP and drive it for years without owing a payment. When you buy a new car and roll over negative equity for an old car you are taking on more debt and extending the time you will be repaying the loan.
Please don’t make this mistake. And please don’t listen to the finance folks at a car dealership. Of course they will tell you it is no problem to roll over the remaining balance on your current car loan into a new car loan. As long as you qualify for a loan, they could care less if this is a financially smart move. All they care about is selling you the new car. I care about your long-term financial security. Don’t fall for the pitch to trade in a car with negative equity. Just because it’s doable, doesn’t mean it is smart.
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