Economics/To sell or not to sell?
QUESTION: Hello, I purchased a new civic last August with $5000 down. At the time, both my fiances and my self had a stable income. Unfortunately a week ago my fiance was terminated and her unemployment insurance was denied by her ex employer. So at this point we have two vehicles. One is roughly 14 years old and in good shape and has no lien on it. The other, a Honda civic that I still owe around $15000. I am glimpsing a very tough and rough future for use on paying bills. I know I can afford the majority of our bills on my income alone. If I held onto my civic, I'm sure we would be struggling and I believe that in the long term, we couldn't afford it. We have a very small savings account for rainy days, and it just started pouring. So, I need some advice on how to proceed. If I sell my civic, we will have the other car, a 14 year old vehicle. I'm worried about it breaking down all the time. I keep maintenance up to par with it, but things happen. What would you do? Thanks for any help you can provide. Sincerely, Jared C.
ANSWER: Thanks for the question!
Unfortunately, this is a difficult one to answer without actually having a look at your financial records, but I can offer a bit of generalized advice.
Your concern about a 14yr old car is certainly warranted, particularly if you only have the one. Based purely on the information provide in your question, I would say your best bet would be to sell the new car (or return it if you can; you're never going to get the full amount back selling a car). Don't stop there, though, go shopping for a used car. The best option, if you're able, is to look for cars being sold by owners instead of dealers, but only if you know how to inspect the car, or at least know someone willing to do it for you. You can find some amazing deals buying from owners, but sometimes what appears to be a good deal is really a critical mechanical problem. What you can do, though, is find a Certified Pre-Owned Vehicle. These are sold by dealerships and come with a warranty, so if anything happens, you're covered for the first x number of years (depending on what warranty you get). On top of the warranty, since the cars have been owned before, then you're buying the car for a price closer to its true value, anyway, since new cars lose a huge proportion of their value to depreciation the moment you buy them. That being said, a dealership can only put a certain number of miles on a car before they can't sell it as new anymore, so they will frequently have demonstration models that are new, but have been test drive quite a bit, and come at a hefty discount compared to the same car when truly new, if you're insistent on buying a new car. Particularly if you're buying a car using a loan, you're not only losing significant value to depreciation, but you're paying far more for that car than its worth brand new simply because you're paying for interest, as well. I'm of the opinion that you should never pay interest for something that doesn't generate value at a faster rate than the interest you're paying. Since cars don't appreciate in value, the question you have to ask yourself is how cheap does a car have to be in order to generate a positive return on investment for you? How much additional income is a car going to generate for you over, say, public transportation, and what's the difference in cost? Once you have that answer, then you can figure out the maximum amount you can spend on a car without it negatively contributing to your net wealth.
Personally, I've only ever bought used cars, and have never paid more than $5,000 for a car. I've owned my Jeep for 5 years, and my van for 2, and both have only ever required minor maintenance.
I hope that helps you a bit.
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QUESTION: Well thank you for your advice. The reason why I decided on buying a new vehicle was two reasons: reliability and my interest loan Apr was smaller. I've had nothing but used vehicles and it seems like I am constantly putting money into maintenance. I keep my cars in tip top shape, but things happen that are beyond my control. I live in phoenix Arizona and I have never had air-conditioning in any vehicle. Before I purchased my car, I looked at new vS. used and it was higher interest rates used. I found my monthly payments were similar to a new car. But if you think it would be to my advantage to seek out a buyer, I will look into it. Where do you suggest I try selling it? Thank you, sincerely, Jared C.
Again, I can't say for certain if it would be in your best interest without a more detailed look at your finances. So, please take this response "with a grain of salt" - generalized education rather than anything resembling custom financial advice. Before agreeing to sell or buy anything, you'll need to calculate whether it actually will benefit you. Here's how you can do that:
1) Shop around to see how much you could sell your car for. Also try used car lots that offer trade-ins to see if the trade-in value surpasses the sale value. Depending on how you've managed your loan, you probably won't be able to sell the car for the total amount you still owe, so this will impact your net gain/loss in changing cars.
2) Shop around to find a reliable used car. Check make, model, year, and condition of the car. Don't be afraid to bring someone in to get a second opinion; since I spent most of my waking life in a classroom, I don't know that much about car inspection or repair, so if I'm really interested, I'll have it taken in for a quick inspection at a local mechanic I trust.
3) Add the cost of buying a used car with the cost of paying-off the remainder of your existing loan (if any), then subtract the sale price of selling the car you currently own. If the total amount is less than the amount you still owe, then you've created a net gain.