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May 18th, 2011 #1
- Join Date
- May 2011
I have been considering selling my slightly used car to CarMax and making up the difference that I am upside down in the deal. I do not drive this car daily. I have a car in which i commute that gets better gas mileage, is older thus less insurance and taxes. I'm thinking keeping the good car is a luxury even thought it may cost me $10,000 to sell it. It will free up $620 per month plus the savings on taxes and insurance. What are your thoughts?
May 23rd, 2011 #2
Sorry for the delay on this...I've been on my honeymoon.
I think you should definitely look to get out as soon as you can. But there can be a few considerations: how much will you save each month, how much will you have to come up with (the underwater amount), and how long will it take to make that back.
Let's look at an example with the following numbers:
Value of the car: $20,000
Amount remaining on loan: $23,500 at 5.5% interest
Amount you're underwater on the car: $3,500
Monthly payment: $620
Insurance (monthly): $100
Monthly depreciation (usually 10-15% per year--I assume 15%): $250
First, how much will you save each month? This is simply the interest, insurance, and depreciation. Based on the scenario above, you'd save the following:
Monthly interest: $110 ($23,500 * 5.5% / 12)
Total monthly savings: $460
So by not having the car, you'll save $460/ month. But since you'll have to come up with $3500 to get out of the car, another way to look at this is to ask how long it will take for you to break even on a cash flow basis.
Assuming the above, your monthly out-of-pocket cash cost is $620 (payment)+$100 (insurance) for a total of $720/month. Based on this, it will take about 5 months to recoup the cash costs of getting out of the car. In essence, you'll have to float that amount somehow for about 5 months before you're cash flow positive.
Although looking at cash flow break even is a useful way to look at how long it will take to recoup the amount you have to flow, this $3500 is part of the loan that you'll have to pay back as part of the loan anyway. For that reason, I think it's more useful to look at the total monthly savings amount.
In this case, the monthly savings is significant and the payback period is short, making it a great chance to save money and an opportunity to clean up your finances.
Hope this helps. Please let me know if you have any questions.
Last edited by ThriftyMan; May 23rd, 2011 at 07:45 PM.Scott started SavvyMoney because he passionately believes that life is better without debt. Since everyone should have a superhero name, Scott decided that ThriftyMan pretty well described his mission to save the world. Scott used to market credit cards, but now dedicates himself to people out of debt.