consultantjournal wrote: samerwriter wrote:
consultantjournal wrote:He said that, if he sold the cars, he'd be short $7500 on each. That's $15,000 of debt with no assets and he'd still need to buy one or two cars to replace his transportation.
While that's unfortunate, it's also irrelevant. Selling the cars and replacing them with lower-value cars that will depreciate less quickly is the quickest way out of the hole.
Right now he may be $15K upside down, but the cars are likely depreciating more quickly than he is paying off principal, particularly because of the high interest rate and long loan terms. Thus every month he owns those cars, he is getting more and more "upside-down".
Perhaps I'm missing something here. Two used 2000 Honda Civics would cost a total of $16k plus tax, which I assume he'll need to finance, since he doesn't have the savings. I assume the rates would be high, since he had such high rates for the original cars. And then he'd still have $15k in debt (if not more for paying off the loan early), for a total of $31k in debt. How is this better? After five years, those cars will be worth about $11k together.
Right now he's "upside down" by $15K on a new Honda Pilot and a used Honda Accord. I'll go out on a limb and say that those cars are, combined, worth $30K. If he is upside down by $15K, then he currently owes $45K. He has $45K in debt and $30K in assets. Moreover, those assets (especially the new Pilot) are depreciating rapidly.
Now let's say he sells both cars for $30K and puts the proceeds towards his existing loans. Now he's $15K in debt with no cars. Then he buys two Honda Civics for $16K. Now he's $31K in debt with $16K in assets. It may seem like his situation has not changed. But the key here is that the older Civics will depreciate less rapidly than the new Pilot.
Let's look at both of these scenarios one year down the line. It's entirely realistic that the Pilot and Accord combined will lose around $5000 of value (mostly from the Pilot). Meanwhile the two Civics will likely not lose more than $2000 worth of value. Now, with the Civics, he's $3000 ahead of where he would be with the Accord and Pilot.
Now as tinyhands points out, this is correct in theory. But there are a couple potential monkeywrenches:
1) (I mean no offense to the original poster, I'm painting with a broad brush here). Buying and selling cars can be fraught with peril. Moreso for used cars. I've seen a couple posts on Personal Finance blogs recently where smart people with good common sense have bought more car than they planned. In fact, it sounds like that may be what already happened in this situation. For someone who repeatedly finds himself on the short end of a car buying/selling transaction, trying to "trade down" may be a good way to wind up with less car for the same money.
2) The OP doesn't actually own these cars, the bank does. So to sell them he needs to pay off the note. That requires some measure of liquidity, which he may not have.
If it were I in this situation, I'd stick a forsale sign in the window of the Pilot, and advertise it in the paper, at a fair price. If someone bit, then I'd do whatever necessary to pay off the loan so I could sell the Pilot. Then I'd live as a one-car family for a while. If that absolutely didn't work, then I'd look for a good deal on a late 90s Civic.