Psssst...hey buddy, wanna trade your car?

Disclaimer: This opinion post is written by a non-expert who shares from own experience. For comprehensive financial planning advice, please consider hiring a "fee only" Certified Financial Planner (CFP) that you will pay a fee rather than buy a particular financial product that they sell to you to pay this fee. One place to look is: www.letsmakeaplan.org

Am sitting in the lobby at the Hyundai dealer waiting for car repairs for my 2010 Hyundai Genesis Coupe and an employee is walking the waiting area to ask customers if they would like to participate in the vehicle exchange program. At least 10 decline the offer but one woman asks for details. Her car has 14,000 miles and she is interested in trading for the mini-SUV in the lobby. I am also thinking how nice it would be to trade my own car for a four-door Equus that does not exist in my price range because these cars retail at $50,000+ and, thankfully, no used models are in stock (the latest used one with more than 80K miles was selling elsewhere for around $24,000)! Still, they are luxe and I want one but not as much as a Tesla which also cannot afford and let me tell you why I am happy NOT to do this; and, writing this true tale is "car"thartic! Bwahahahaha!

Let me be clear that I am not criticizing her decision nor did I feel it appropriate to pull her aside and talk her out of it because I got my current car in the same way and am very happy with it even with 83,000 miles and today's four new tires, oil change and other repairs totaling $1,200; however, from own foresight and hindsight, I knew then and now that our mutual decision is a bad idea due to revolving debt. This means that you buy something and this payment keeps you in debt rather than allowing you to save your money to buy something in the future or to put this money toward your future and unexpected needs. In the United States, we keep ourselves in debt because we feel that life is uncertain and we deserve things but we are always sabotaging our financial futures with this mindset.

See, her car is almost new (as my Hyundai Sonata was then with 16,000 miles). We both wanted something better. For me, the Genesis was sporty, not stodgy, and could keep up on the interstate with its v6 engine unlike the modest four cylinder. 

To keep the math simple, let's say she trades her car back for $6,000 (my own trade-in value and the only payments remaining on the car) and Hyundai uses their facility to recondition and sell it for $13,000 (retail price: $17,000). Meanwhile, she buys the new SUV for $30,000. This is not far off from my own $24,000 purchase in 2010. This means that I turned a remaining $6,000 car payment with them paying off the remaining balance in exchange for a car with only 14K miles into my new $24,000 car payment on a five-year note at 1.3% interest (a rate financed through Hyundai at a rate much lower than the bank since, thankfully, I have good credit).

BUT

Suppose I bought my current car at $24,000 (like her $30,000), drove it home and then had an accident; or, could not make the payments (either $422 minimum or $600 per month on a faster payment schedule for own car with a five-year note at 1.3% interest since I had good credit). I have no idea her credit score but this could also greatly impact both her monthly payments and loan terms.

Following an accident, the insurance would always value the car lower than the retail price because the minute the car leaves the lot it loses about 20 percent value. In addition, you are paying to fix a damaged car that is not paid for, yet, and (depending upon the damages, you may be upside down for continuing to pay for a car that you no longer have if it's totaled and still need to buy another car. Money upon monthy money. Not good financial sense. I was able to make accelerated payments and finish in three years and six months but it was painful seeing $600 per month go to a car rather than my pocket!

In rounded dollars, here's how this "deal might look (accident aside):

Her car retail cost: $30,000 with five-year loan

My car retail price: $28,000 with five-year loan

Our trade-in:

Her car (14K miles): $10,000 with unknown repayment balance 

My car (18K miles): $6,000 payment remaining 

From a financial standpoint, this means that we each took a car with payments remaining and traded for a newer car and higher payment (assuming want to pay the car off in less than five years because a five-year car note is asking for trouble due to accidents or additional expenses since a car is always a depreciating asset).

Update: The SUV is still in the lobby, am still hoping she changes her mind.