Can I trade in my new truck for a cheaper car?
I have a truck that I just bought for $35,000. It’s now worth about $31,000. Can I trade my truck in for a $20,000 car? What happens with my negative equity on the truck and my sedan that I just paid for with the trade–in value?
Submitted by Jae E.
It’s common to buy a car and want to trade it in the next year for another new or used vehicle. In my own life, upside down car loans have probably cost me thousands of dollars. If you owe more on something than it’s worth, in the terminology of the industry, that is known as being upside-down. This applies to roughly half of all new-car buyers, according to Cars.com.
Let’s crunch the numbers
You bought a truck for $35,000, but now it is worth $31,000. That’s a $4,000 reduction in value. If you financed $35,000 on your vehicle for 60 months with a 4.27% interest rate, your payments are about $648.85/month. Your loan balance after 12 months would be approximately $28,583.69. If your truck has depreciated 25% or about $8750* in year one, the trade value would be about $26,250** even though the book value is $31,000. Unless you sell to an independent buyer, you hardly ever get book value when you trade a car with the dealer.
Based on this scenario, you would be upside-down on your loan about $2,334*** after one year. In this case, your new car purchase price is $20,000, but you owe $28,584. It’s only worth $26,250, so you would be paying $20,000 plus the balance of $2,334 or be paying and financing $22,334 under this scenario.
Avoiding Upside-Down Car Loans
To prevent being upside-down car loans again, try to avoid buying new cars unless you have the funds to put at least 20% down. Unfortunately, many people don’t understand the complicated financial and behavioral consequences of buying, selling, and trading vehicles. Once you’ve cleared up your problems with your upside-down car loan, do what you can to keep yourself from ending up in the same situation again.
*Car Loan Amortization Schedule Year 1
**Purchase Price ($35,00025%) Depreciation $8750=$26,250
***Loan Balance after one year = $28,583.69 – Trade Value $26,250
You owe $2,334 more on the car than it’s worth.