The Math of Trading Down
January 1, 2010
By Scott Lewis
In a down economy it can be hard to find extra money. Budgets get stretched thin, and bills seem to only go up. If you bought a car at the limit of what you could afford, and that did not get easier over time from salary increases and the like (pay cuts, gas price increased, rent increased, groceries increased, etc.) then you are with me.
It is time to act like we are living in a recession. I am tired of
the high payments of my 2007 BMW 335i. I am going to trade down,
and get something far more affordable.
Like many people I owe more than my car is worth, so I will have to pay out of pocket when it comes time to trade. This will also have the unfortunate side effect of not having any money to put down on the next car. I can expect to be upside down again, but as you'll see it will be for the better.
Ideally I would like to sell the BMW and pay out of pocket to pay off the loan then start over with another car, but I do not have that much cash to bail me out. I also must have a car to drive everyday. So I am going to have to do this in one transaction. By the way, if you do sell first then you are also stuck with the government's scam of paying sales taxes on the purchased vehicle. By doing a trade down in one transaction there will be no sales tax. This means we are forced to buy from a dealer.
Due to how much upside down I am on my BMW, and the amount of money I have available for this, I need the price of the car I buy to stay below $17,000. Next month I am going to cover my choices for this, but for now let's just look at the math.
Below is a copy of a spreadsheet I created for you to use. You can download the spreadsheet here.
|Year/Make/Model||2006 Car #1||2005 Car #2|
|Current Loan Balance||$32,238||$32,238|
|Current Trade-in Value (KBB Good Cond.)||$23,300||$23,300|
|Actual Trade-in (negative)||-$8,938||-$8,938|
|Sales Tax Rate||8.00%||8.00%|
|Sales Tax (if necessary)||$0.00||$0.00|
|Title & License||$200.00||$200.00|
|Max to Difference Finance (KBB retail value)||$20,115||$18,345|
|Difference between price & value||$4,120||$4,354|
|Mandatory Down Payment||$5,018||$4,784|
|Extra Down Payment||$982||$1,216|
|Total Down Payment||$6,000||$6,000|
|Loan Amount w/ $6K down||$19,133||$17,129|
|Monthly Payment w/ $6K down||$348.07||$311.61|
|Loan Amount w/ minimum down||$20,115||$18,345|
|Monthly Payment w/ minimum down||$365.93||$333.73|
I used real numbers in creating the spreadsheet. The car prices are from two actual cars I was looking at at the time I wrote this article. Here are some points about spreadsheet for you to consider:
The rest of the spreadsheet is simple enough. I guessed at title & license, and sales tax is in there for those of you with equity in your vehicles. It will calculate the sales tax based on the difference between the old and new vehicle.
Feel free to download the spreadsheet and work up some numbers for yourself.
For every used car ad I see I plug the numbers into this spreadsheet. If it causes the down payment to exceed $6,000 I skip the car. This fact alone has saved me a lot of time and trouble doing the math car after car. It takes a minute or two this way. Just look up its value on KBB and enter the three numbers. You will know right away if you can use this plan to trade down yourself. If you have less cash, just adjust the total down payment amount to what you can afford and start looking for cars.
And yes, at the time of this writing my credit union was offering 3.5% for 5 years on used car loans.
That's it for this month. You have the math to determine if you can successfully trade down. Please let me know if you use this. I would like to know it was useful for more than just myself.
Next month I will tell you what vehicles I am looking to trade down to.