Choosing The Right Car Payment

The Right Payment? It is not necessarily the least expensive payment. The Right Payment will include the fact that it fits in your budget, but that does not make it the Right Payment unless you are the type of buyer that hangs on to your vehicle until the time that it is paid for or nearly paid for.

For most buyers-the ones who trade out of their vehicle before it is paid for-the Right Payment is one that must also allow you the freedom to make your next car deal without negative equity.

Negative equity is one of the most dreaded terms in the car business. It describes the fact that the vehicle you are trading in ain’t worth what you owe on it. In the biz, we also call it being “upside-down.” There are, of course, degrees of negative equity.

Most buyers allow the dealer to roll the negative value into their next car payment. When the negative is small, we might say, “the value of your trade is close to your payoff, so it will make the payment on your next vehicle (assuming the purchase price was close to the price of the vehicle they are trading in) a little bit higher than your current payment.

” When the negative value is higher, say $3000 to $4000, we say, good news, we were able to keep you in the same pay range as long we make this loan twelve months longer than your last loan. When it is higher, say, $5000 to $7000, we say, “we’re going to need about $2000 down to get you in the same payment range with a loan that is twelve months longer.”

The Right Payment For Car

When it is higher still, $8000 and higher, we will tell you that the conditions are unfavorable for trading out now, but see us in a year. When you leave, and we tell our spouse about our day, we will refer to you as the customer who was “buried.”

Negative equity rivals only bad credit as ingredients that most quickly poison a car deal. Tell you the truth; I’d rather have a deal killed by bad credit than negative equity…at least bad credit is something that the buyer can own up to.

When the buyer is dealing with negative equity, and you’re the one that sold them the vehicle they now want to trade in, the buyer can easily transfer blame to the person that helped them construct the deal they are currently in.

Not a pretty sight. Though I am in the business, I have to tell you that car dealers willingly assist you in overbuying. The more profitable the deal is for the dealer, the longer it will be until you can trade out of the vehicle you are in.

In a perfect world, the dealer would step back and keep you from spending too much, knowing that they are prolonging the time until you can purchase again, which directly affects their future sales. In reality, the dealer looks at their daily needs and will make a deal as profitable as possible.

Here are some questions to ask yourself when buying:

What has been my pattern in terms of getting into new vehicles? If I have habitually traded in and out of a vehicle in a 36-month time frame, I can likely expect my next purchase to be traded in a similar time frame. Do my payments reflect the actual cost of owning the vehicle?

If I trade my vehicle every three years, then the value of my current vehicle should be at or near the payoff amount at the time I trade. If it is not, the length of my current loan is too long. Is my “real” payment range-the one that reflects the true cost of ownership in keeping with the vehicle I am buying?

For example, you find that a $20,000 vehicle, financed for 4 years, allows you to trade out in 36 months, with no negative value. You also discover that you can buy a much nicer $30000 vehicle for the same payment if you finance for 6 years. The 6-year note problem is that you will be totally unprepared to exit the vehicle in the same 3 year period.

What You Must Do to Get the Right Payment:

1. Buy Right: Every dollar you overpay will come back to haunt the car owner who wants to get out of that vehicle in a few years.

2. Ask the dealer to construct the loan so that you will be at a break-even point at the time of your projected next deal. (This is not as hard as it sounds. Dealers have “residual value” factors for their vehicles.

These are the values used in constructing leases. Someone at the manufacturer’s home office spends a great deal of time determining your vehicle’s anticipated future value to structure lease payments that are fair to both the buyer and seller.)

a. Here is an example. You wish to buy a new sports car and know that you buy a new vehicle every three years. The vehicle has an MSRP of $28000, and you can buy the vehicle, after rebate, for $24000.

You ask the dealer what the projected 36-month residual value is, and they tell you 42%. Therefore the anticipated cash value of the vehicle during the time of your next, likely purchase, three years later, is $28000 x 42%, or $11760.

You will then ask your dealer to construct a monthly payment that creates a break-even point three years into your loan-which is the time you will want to trade out. Your payment maybe $40, $50, or higher, per month, but it is the cost of being honest with your finances.

3. Consider a Lease. If you intend to trade out of a vehicle in three years or less, consider a lease. If you are a low mileage driver, you will likely be able to complete the lease term while still in the manufacturer’s warranty-saving the cost of an extended service plan.

If you are a high-mileage driver, the lease is still a good option because your lease (assuming it is structured for the projected miles) will accurately reflect the true cost of ownership. Leases are like rent. When your last rent payment is finished, you can move on to something else. If you own and the vehicle’s value is less than what you owe, you must come up with cash or finance the amount in your next car deal.