Avoid Pitfalls on Auto Trade-Ins Resist the urge to buy a new car if you still owe money on your old one. Our financial consultant says you may save money in the long run if you choose a a shorter term loan when you're buying a car.
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Avoid Pitfalls on Auto Trade-Ins

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Avoid Pitfalls on Auto Trade-Ins

Avoid Pitfalls on Auto Trade-Ins

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This is DAY TO DAY from NPR News. I'm Alex Cohen.


I'm Madeleine Brand.

Maybe the two of you have been together for years. It was great at first, but now, well, it's getting a little old. You miss the excitement, the novelty, that smell. I'm talking, of course, of your love affair with your car. If you're looking to trade it in, be careful. Breaking up can be hard and expensive, and you might find yourself owing more on your car than its worth.

Here with more is DAY TO DAY's personal finance contributor Michelle Singletary. Hi, Michelle.


BRAND: Okay. I understand there's a special term for this.

SINGLETARY: Yes. Well, if you break up and you still owe money on your car, you can be what's called upside down on the loan, meaning that you owe more than the car is worth. According to Kelley Bluebook, about a quarter or more of car buyers are upside down on their loans, owing as much as $3,600 when they go to trade in the car.

BRAND: Whoops. So how do you avoid owing money?

SINGLETARY: Well, first of all, you keep the car. Stay in the love affair. You know, get new car smell and spray it in there. You know, rejuvenate the love affair. You don't want to trade-in the car when you owe a balance on the loan. And then, many car owners are rolling that balance into the new loan. Or they take a cash rebate. And instead of, you know, reducing the price of the car they're paying on, they have to use their cash rebate to make up for the difference in the loan that they owe.

BRAND: Well, the standard loan is, what, five years for a car?

SINGLETARY: Now the average car loan is five years or 60 months. And now there are car loans as long as six, seven and even eight years.

BRAND: So how do you avoid that? How do you avoid getting into such a long-term loan where you're paying and paying and paying and it never ends?

SINGLETARY: Well, you want to stick with an affordable loan. And, for me, that is anything of 48 months or less. If you can't pay that car note on a four-year loan, that means you can't afford that car. Now, I know lots of folks don't want to hear that, and they get those five-year loans to stretch out the payments and make the monthly payments more affordable. But that says it right there - more affordable. You need to look at a car that fits within your budget. And when you get a shorter car loan, you're less likely to be upside down in the loan because you pay the balance off sooner. Many people are upside down in the fifth year when they still owe money on the car.

BRAND: Michelle, when most of us are on the car lot looking at cars, we're kind of blinded by the idea of getting a brand new car. But should we really be thinking, well, gee, four years down the line I'm going to maybe resell this or get rid of it to buy a new car, what's the value of it?

SINGLETARY: Absolutely. And certain models retain their value better than others. For example, a Honda Civic maintains about 51 percent of its value after a five-year ownership, whereas a Lincoln Town Car retains about 19 percent of its value. So you can see that if you've got a five or six year loan and your car is not going to hold its value longer, you're going to end up upside down on that car loan.

But this is one of the ways that people don't increase their wealth. They sink so much money in a depreciating asset, which is a car. They'll say things like, well, this car is going to hold its value. The fact of the matter is no car, unless it's a classic car or, you know, some antique car, holds its value. So your goal is to get into a short loan and look at the resell value, so that if you are the kind of knucklehead - sorry - person who likes to trade cars every four or five years, that you're at least getting a car that holds its resell value better than other cars in its category.

BRAND: Michelle Singletary is our regular expert on personal finance. She writes the nationally syndicated column "The Color of Money." She drives an old clunker. Thanks, Michelle.

SINGLETARY: You're welcome.

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