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Each year, people like the idea of getting a better car so they trade up. Is this a good idea? Sometimes. Sometimes it is not. When is the trade up a problem?
You want a new car. Great. You go to the dealership, shop wisely and get the car of your dreams. The payment might be a little high but you can handle it. Then, a year goes by. Maybe it’s two years. Now that dream car doesn’t look nearly as nice as the latest one so you want to trade up. You go into the dealer again, discuss trading up. The salesperson is delighted to help. You drive out with the newest car in the line. Not bad. You traded in your other car, financed the whole thing and it only added a little more onto your loan. The payment is only a little higher than it was before. You love doing this because you can have a new car to drive fairly easily each year.
What is wrong with this picture? For one thing, it is obvious that you have not yet paid off the first car. So, where does the balance go? It goes right onto the new loan making the loan much higher than the sticker price for the second car. People do this year after year. And get themselves into major debt doing it.
The problem here is that even though the person is getting a brand new car every one to two years, the balance from the previous car or cars is always right there in the deal, making the payments and the loans much, much bigger. And what happens after a few years of this? Massive debt and loans that cannot be paid back. Then comes the default on the loan, repossession. Your credit is now trashed. And all this is because you wanted a nicer ride. Come on.
Do the basic math. If the first car is not paid off and a new car is bought, the balance from the older car has to go somewhere. It goes on the new loan. Now the loan is much bigger than the new car’s worth. If you do this again, the worth of the car cannot possibly cover the security of the loan. If you default, you still have to pay off the balance of the loan. Now you are stuck in financial hell. Okay, you could give the car back. Nice but no cigar. You will still be liable for the balance of the loan you signed for. And you have nothing to drive.
So, what is the solution to the problem? You might just have to ride it out. But there is one thing that can be done but you have to decide what you want to do….have a nice ride or get out of debt. If you want to get out of debt, you can trade down. If you do that, the loan could be smaller, less in payments and even though you have a used car, your debt will be smaller and slightly easier to pay off. No, it isn’t going to fix the problem completely since you still have to pay the loan off but it might just give you a chance to pay it off instead of having massive car loan payments to make. It just might give you a little relief.
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