I’m Upside Down and I Can’t Get Up!

I was talking to a friend earlier this morning about her plans to buy a new car. We talked about the pros and cons of buying new vs. used and leasing vs. buying.

So as the conversation winds down we realize that the reason she is considering leasing this time around as opposed to buying is because she feels that she has to kick out an extra $3k anyway, so why not lease? $3k if she sells because she is upside down and $3k if she leases and goes over the mileage or incurs other related fees and expenses. She also mentioned that she changes cars every two years.

Here are some tips on how to avoid becoming upside down on your trade :

• Buy a car that you can afford. Its that simple. If you have to put down more than 20% and take on a higher than usual monthly payment then perhaps you should consider a less expensive car.
• When thinking about the purchase, consider not only the price but also the interest rate and the corresponding payment. Get a schedule that tells you how much of that payment goes towards the principal. Will that align itself with projected depreciation for that make and model?

• Research the car. Will it hold its value? What kind of maintenance will it require? How much? Are parts expensive? Will you put more into the car than it is worth? Is it a salvage? Carfax is your friend.

• Check www.autotrader.com, www.cars.com, and your local listings in www.craigslist.org for both private and dealer pricing. Compare prices and make the best choice given the seller specs.

• Keep your car longer than 2 years. Think about it, if you don’t make at least a 20% down payment then you won’t cover the first year’s appreciation. You will move into the 2nd year upside down. Keep the car and continue making payments, even sending extra payments when you can. When you can break even, then you should consider selling or trading in.

• Make at least 20% down payment of the car’s value. It may sound like a lot to some but if you don’t then you won’t cover the first year’s depreciation and end up with negative equity. According to Edmunds.com: Smart money managers, who make a 20% down payment, have more freedom to make a change in the car they drive. During the second year, when the car depreciates at a much slower rate, they would begin to build equity in their car. During a trade-in, they would actually get a positive credit toward the new car.

Now if you are already upside, that’s unfortunate, but here are some tips courtesy of Black Enterprise:

HOW TO GET RIGHT SIDE UP
Here are some tips for avoiding negative equity in your trade-in:

• Don’t tell the salesman about your trade-in. Wait until after there is an agreement on the purchase of the new car. If you still owe on your current car, trading it in may not be the best option.

• Do the math. Calculate how much your car is worth and how much you owe on it. If you owe $3,000 on a car you want to trade in, for example, you could end up with a higher car note.

• Make car payments on time. Hill says it’s best to make car payments on time and not to defer them. You will have to pay interest on the deferred payments, which will leave you with a balance once you reach the end of your loan.

• Look beyond the monthly payments. “You could gain thousands of dollars in negative equity by focusing only on how much you can pay monthly,” says Tamara Hill, Internet salesperson for David Maus Toyota in Longwood, Florida. The dealer can always work the numbers to suit your desired payment schedule–don’t fall into that trap! “Your focus should be the entire cost of the car,” says Hill

Remember, its just a car, that gets you from point A to point B, and the more you keep that in mind the more you will be able to see this as a financial transaction and not a status marker.

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