Don’t Pay a Multiple of a Car’s Sticker Price

February 17, 2017

Anyone who has ever been a passenger in my car knows that I am not a big fan of buying new cars very often. My last two cars got to 250,000 and 300,000 miles before I sold them for parts. My current car is a 2002 with over 150,000 miles on it and I’m hoping to get this one to 300,000 miles.

Living on the East Coast, with all the snow and salt, bay/ocean water and sand, the exterior of cars can take quite a beating.  Mine certainly has. That doesn’t even count the kid who rode his bike directly into my driver’s side rear door, leaving a gigantic dent and paint scrape. Needless to say, my car isn’t going to win any beauty contests, but I haven’t had a car payment in a decade or so. I’m not much of a “car guy.”

That’s why when I read this article about negative equity in car loans reaching an all time high, I found it very alarming. Negative equity, for those who are unfamiliar with the term, is not a wonderful thing. If you owe $10,000 on a car that’s worth only $7,500, you have $2,500 in negative equity. Just about 1/3 of all new car purchases in the first three quarters of 2016 had trade-ins with negative equity and that negative equity was, on average, just over $4,800. That’s nearly $5,000 on top of an already fairly expensive purchase.

To me, this is a huge warning sign about how we think (painting with a broad brush here) about the value of a car. To me, a car is just a way to get from Point A to Point B quickly without needing to walk in the rain. To a lot of people, the type of car they drive is a reflection on who they are as people and they are willing to make questionable financial choices in order to have their car reflect the values that are important to them.

If I owned a coffee shop (I’ve been watching Friends episodes with my kids, so Central Perk is stuck in my head) and would sell you a cup of coffee for $3 but would charge you $8 if you drank half and asked for a new cup, how many new cups do you think I’d sell? I’d hope ZERO! But that’s what we do with cars. We (the folks with negative equity) drive them for a while and before we are finished with them (like getting to 300,000 miles), we trade them in for a much more expensive but shinier model and we add to the cost with that troublesome negative equity.

If a person repeats this pattern a few times, they might end up paying almost twice the sticker price for a car. If you add in the cost of interest on a car loan, it could be 3 or 4 times the sticker price. There’s not a car in the world that I’d pay that much for.

I wrote a while ago about how to save money when buying a car, and I still very much believe in that philosophy when buying a car. If you use it, or something similar, you can avoid the ever-growing problem of negative equity in your next car purchase. As pricey as cars are today, don’t let yourself pay a multiple of the sticker price.