Silly to trade in new car for used?

[mcjohn4]

New poster to the forum, but have loved reading for quite a while. I have a question that I think deals with my sunk cost mentality.

Last July I purchased a new Honda CRV, got about 8k worth in trade in/down payment, and was left with about 18000 to finance. Went through Honda, got a 6 year plan with 0.9% interest fixed. I pay $303 per month.

The payments aren't the issue, but as I'm aggressively paying down my student debt (45k to 25k in 3 years) and looking to invest more (just starting 401k this year at age 29), that car payment looks like it could do a lot of good elsewhere. I still owe about 15500 over the next 5 years, and the value of the car is around 21k. I'm thinking about trading it in and grabbing a late 200X's Ford Focus or something of the like with about 50-60k miles on it. I believe I could trade and get an older vehicle with about $5000 left for me to pay. I could pay that off in 2 years and be $10,000 ahead of where I would be with the CRV, but I am gambling on mechanical issues and a lack of warranty. Would I be making a foolish choice here? Any advice is great!

For reference: 29, just starting retirement savings, total debt (with the CRV approx. 40k), Monthly take home at $3415 (soon to be $2990 in 6 months with loss of roommate income).

[bjl584]

As long as they give you what the car is worth and you don't end up upside down on the loan it should be a good move.

But, just because KBB says that the car is worth $21K, that doesn't mean that is what the dealership will offer you on trade. Especially on a used car. You'll have to go pound the pavement a bit and see where the numbers come in at.

[mcjohn4]

As long as they give you what the car is worth and you don't end up upside down on the loan it should be a good move.

But, just because KBB says that the car is worth $21K, that doesn't mean that is what the dealership will offer you on trade. Especially on a used car. You'll have to go pound the pavement a bit and see where the numbers come in at.

Oh definitely, I would more realistically work with a number around 18-19k for planning this out, and it would be a huge commitment to go to several dealers to find something worth having I'm sure!

[greenskeeper]

mcjohn4 how many miles do you drive a year? Are you good with vehicle maintenance? If you are then any car well maintained to should last at least 150-200k easily.

[autoxer]

Last July I purchased a new Honda CRV, got about 8k worth in trade in/down payment, and was left with about 18000 to finance. Went through Honda, got a 6 year plan with 0.9% interest fixed. I pay $303 per month.

There is something wrong with the numbers. $18k financed for 6 years at .9% would only have a payment of $256. Are they adding some other fees into that?

The idea of trading down isn't silly at all. You can reduce your depreciation, reduce your fuel cost, reduce your insurance cost and reduce your financing cost.

If you can sell it for $21k and you only owe $15.5k, then you could even pick up a used car without any loan and free up the cash flow right away.

[snafu]

I'd take a photo and run an ad in your local, on-line auto trader at $ 21K and see what response you get. Anyone who has had a CRV knows what a terrific vehicle that is in spite of lousy mileage.

[ANewHorizon]

While it is true that you could get an old cheap car for way less, you would be better off getting a slightly higher cost older car that has a better reputation for quality. A Ford Focus is a really junky car that would most likely give you a lot of headaches. Why not trade down to an older Honda Accord or similar?

We were in the same position a couple years ago and after looking at our options, ultimately decided not to trade down due to the fact that would have caused us to be upside down on the new-to-us car.

[feh]

As long as they give you what the car is worth and you don't end up upside down on the loan it should be a good move.

+1

A 72 month loan for a vehicle is a big mistake. Take the necessary steps to undo it.

[ua_guy]

I'd take a photo and run an ad in your local, on-line auto trader at $ 21K and see what response you get. Anyone who has had a CRV knows what a terrific vehicle that is in spite of lousy mileage.

I agree, autotrader, craigslist, if Yahoo still has a listing for cars for sale, put it up there and see if you get any hits.

[mcjohn4]

There is something wrong with the numbers. $18k financed for 6 years at .9% would only have a payment of $256. Are they adding some other fees into that?

The idea of trading down isn't silly at all. You can reduce your depreciation, reduce your fuel cost, reduce your insurance cost and reduce your financing cost.

If you can sell it for $21k and you only owe $15.5k, then you could even pick up a used car without any loan and free up the cash flow right away.

I was incorrect, it was a 5 year loan, that's why the numbers didn't work out

[JoeP]

Not to beat you up, but why did you finance a new car for 5 years when you still had so much in student loans?

If I were in your shoes, I would consider selling the CR-V today, getting a "beater" for around $4k-$6k, and then driving that for the foreseeable future. Your student loan will continue to get the payments you're making now, plus the wad of cash you'll net from selling the CR-V (minus the beater cost). After student loan is paid off, keep paying yourself the student loan money, split into an emergency fund and a Car Replacement fund. Keep the beater alive, but when the repair costs exceed a specific level (e.g., more than $2k in repairs over a span of 6 months), sell it and use your Car Replacement fund to get your next car: a used car, about 3 years old, with <60k miles.

Don't be turned off by the term "beater." Today's vehicles last a very long time. My current ride is a 2001 with 66k miles, purchased for about $6k 7 years ago and KBB valued at ~$2600 now. So cars like that are out there, and can save you a ton of money. Of course there are risks, but a good mechanic and access to youtube can save you a lot of headaches.