@Anonymous wrote:
Stop the negative equity cycle. Deal with your current negative equity first and save up a healthy down payment on the next car. Spending even more money to get out of $7k negative equity doesn't sound like a bargain to me.
The entire auto loan cycle is nefarious and contrary to building wealth, but few discuss it. Negative equity, positive equity, it's a real hammer on long term wealth building, but we all do it, and we do it because we assume we can afford it month-to-month.
I recently posted on my blog some amazing points to make on auto loans and a typical individual...
If a person finances a new car every 5 years with a $30,000 loan at 5% (after trade-in) and does this 6 times in their life (30 years of borrowing), the numbers say one pays "only" $566/month or $3,968.22 in interest each loan. So over 30 years, that's about $24,000 in interest. Doesn't sound too shabby, just $100/month or whatever paid in interest every month for 30 years. After 30 years the only asset they have is the trade-in value on the most recent vehicle.
On the flip side, if a person saves up $30,000 to buy a car for cash (after trade-in) and drives the car for a full 5 years while putting away money towards buying the next car (let's say $566/month in savings) to pay cash, after 5 years with the money parked in a 7% S&P returning fund, they will have $40,500 in investments. They take out $30,000 to pay for the car and say $2000 to cover taxes on growth, leaving them with $8500 in their investment fund. That's after 1 car cycle. At the end of the identical cycle #2 (5 more years), they now have $52,500 in the fund. Remove $30,000 to pay cash for a car and cover $2000 in taxes and they have $20,500 left. At the end of cycle #3 (5 more years), they will now have $69,500 in the fund -- again remove $32,000 for the car + taxes leaving $37,500 left and go into cycle #4 and you're looking at $93,500. Repeat for cycle 5 and you're left with $127,500. Finish with your 6th car in 30 years and at the end of the 5 year period you have the trade-in value of the car along with $175,000 in investments.
It's incredible to think about. The best thing someone can do today to finance a car is finance the absolute cheapest new car that gets them from A to B if all they do is commute (let's ignore kids and work trucks in this scenario) and then start shoving money into an investment so you can pay cash in 5 years. There's no loan, not even a 0% loan, that makes much sense otherwise. Even a 0% interest loan means you're paying backwards than paying forwards.
So negative equity versus positive equity is only one small sliver of wealth building! $130,000 lost to "opportunity costs" in half a lifetime is a ton, imagine what that number is if your first car loan is at 18 and your last car loan is at 72... Might be half a million dollars lost.
