giving new car keys

For many of us, having a car is a necessity. For some families, two are needed. But I see far too many households spending way too much on this need.

The big tell is that nearly 30% of the cars traded in to purchase a new car these days still have a large unpaid loan balance. According to Edmunds.com, the average loan balance still owed on a car that was traded in for a new car earlier this year was nearly $7,000. Typically, that means someone trading in with “negative equity” is talked into adding that existing remaining balance to the balance of the new loan they take out on their next car.

Unless there is a really, really good reason for a trade-in (your compact no longer works for a growing family), adding debt from an old car loan to a new car loan is a really bad financial move.  It should always be your goal to borrow as little as possible for a car. Period. Full stop.

Yet the average age of those negative-equity trade-ins is just four years. Don’t tell me it went off warranty and you want the security of a new car under warranty. Come on, that’s just an excuse. Cars are built to be reliable for a lot longer. In fact, Edmunds’ latest report on negative-equity trade ins found that some of the most reliable makes were being traded in with large loan balances.  The far better move is to commit to ongoing maintenance of your car. Spending $250, $500, $1,000 or more, a year to keep a car in good shape is how you extend the life of your car.

Ideally I want you to have at least three to five years where you are driving a car and don’t have a loan payment.  It is in those years that you can use the freed up money from not having a loan payment to focus on important financial goals. Maybe you keep paying the same monthly amount into a savings account that will enable you to make a bigger down payment on your next car.

Maybe you use the money to build up your emergency savings account. Or boost what you’re saving for retirement.  Being smarter about how long you keep driving the car you have makes all of that possible.

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    Categories: Car Loans, Credit & Debt