The new car models of 2020 are already being released for the public’s infatuation. For many who are still rocking the previous models, the latest upgrades call out like Sirens. They’re sleeker yet more spacious, have better fuel-efficiency, and they incorporate all the latest gadgets and features in modern day luxury. Barring the obvious setback—not having enough money—are there any downsides to trading in your car?
Why Would You Not Trade It In?
Buying, selling, and trading in cars are difficult financial decisions. What makes financing cars tricky, as opposed to houses or stock investments, is that cars depreciate over time. They are what is known as a depreciating asset.
New cars lose somewhere between 20-40% of their initial value after the first two years of ownership. If you have a ten-year loan, your car could be considered negative equity after the first year or two. This happens when the cost of the loan exceeds the value of the vehicle. This makes selling your car nearly impossible. After you sell it, you’d still owe money on the loan.
Dealerships offer to pay off the existing loan when trading in a car for its newer model. But this leads people into an uncomfortable trap. When refinancing the loan for the newer model, dealerships can add the payoff cost onto the new loan, trapping customers into high interest rates and unpayable debts.
To avoid this mess altogether, it might be easier to break down when it’s worth trading in your car and when it’s not.
When It’s Worth It
There are some situations where trading in your car is financially advisable.
- Your car is a gas guzzler – Filling up the tank is a cost that adds up quickly and silently. The average car owner in America pays somewhere around $2,000 each year to keep their gas tanks filled. If the newer model has a significantly improved fuel efficiency, then trading in your car is an investment opportunity. For example, if you go from spending $3,000 to $1,500 per year on gas, you’ll have saved $7,500 in five years.
- The dealership offers a signing bonus or credit – This is where reading the fine print matters. Not all dealerships use shady tactics to get car owners to double down on their loans. Some genuinely help by giving credit back to the owner to finish off the loan payment. Check with your local dealerships to inquire about trading in your car – and don’t feel limited to your immediate area. For example, trading in your vehicle in center of downtown Chicago might not get you the deal you want, but traveling 20 miles out to an Audi dealership near Hinsdale could help you get the value you’re looking for.
When It’s Not Worth it to Trade in Your Car
Traditional financial advice says to only trade up your car when you absolutely have to. Needing an extra seat in the car or upgrading the safety features are viable reasons for swapping cars. But sometimes it’s not about the pragmatics. It’s about style. Here are some examples of when you should reconsider trading in your vehicle.
- Your car is still relatively new – Try to hold off on trading if your car is only a few years old. Five years is the minimum advisable time. Eight years or more is optimal. The idea is to get your car loan as low as possible. The longer you hold onto your current car, the better offer you’ll receive when trading it in.
- When your car is in good shape – If your car is functional and runs well, then you have time on your side. Holding onto it means getting a better deal in the long run. In the meantime, continue to care for your vehicle and keep your car in good condition.
If You Do Trade
Always make sure you understand how your current car loan is being refinanced. Ask your dealer to put in writing what they’re doing. This is a simple way to avoid shady deals because you’ll have the records on your side.