Stop Doing this When You Buy a Car

Posted By : admin
Category : Budgeting
22 - Feb - 2016

As a bankruptcy attorney assisting people in the Indianapolis area in filing bankruptcy, there are certain patterns that become evident in getting people into financial trouble.  Of course, cars are some of the biggest purchases that people make, so it is no surprise that vehicles can get people into financial trouble.  And, while people spending too much money on cars is certainly a problem, it’s not what I am going to talk about in this blog.

One thing people seem to be doing more and more is rolling negative equity into the purchase of another vehicle.  And, it’s a problem.  What do I mean by “rolling negative equity?”  It is when a person trades in a vehicle that is worth less than is owed and then buys another car.  For example, if Tara takes a $10,000.00 vehicle that she owes $17,000.00 on to a dealership because she wants a new car, the dealership might offer her $7,000.00 on trade.  If Tara wants to buy a $25,000.00 car she is not only financing the $25,000.00 that she paid for the newer car, but she is also going to need to finance the $10,000.00 that she still owes on the car she is trading in.  As a result, Tara is paying $35,000.00 for a vehicle that retails for $25,000.00.  So, Tara doesn’t have a car payment that is similar to that of a $25,000.00 vehicle, she has a car payment of a $35,000.00 vehicle even though her car is worth around $25,0000.00.

Once a person rolls negative equity into a new loan they have more issues than just a larger than necessary car payment.  They also have the issue of insurance.  If Tara gets into a car accident on her way home from buying the newer $25,000.00 car then her insurance company isn’t going to pay her $35,000.00, which is how much she financed.  Instead, they will likely give her less than $25,000.00 and she is required to continue making payments on a car she doesn’t own.

Even worse, when someone starts the process of rolling negative equity into a car loan, the process seems to continue.  Once a person has rolled in negative equity a few times you end up with a used Ford Fusion payment of $550.00 a month for 72 months.  And, while it is off topic, I cannot help but point out that financing a car for anything over 36 months means that you can’t afford the car and that you should find a less expensive car.

The bottom line is, keep the car that you have at least until you have paid it off to avoid a negative equity situation.  In fact, it’s much better to keep the car for as long as possible and use that time when you don’t have a car payment to save up money for another car.  Ideally, you won’t have to finance your new car at all and you will be on a road to financial freedom!