Match Car Loan to Ownership Plan
By: Jeff Brown

If you listed life’s best moments, driving away from the dealer’s in a shiny, fully-warranted vehicle would have to be up there.

But down the line, when it’s time to trade in or sell your car, the experience can be rather unpleasant. Your next car is sure to cost more than the old one, and you may still owe more on the old car than you’ll get for trading it in.

Nearly everyone who takes out an auto loan is in this “underwater” condition at the start, as vehicles lose value very fast in the first couple of years, while the loan balance shrinks comparatively slowly.

But if the loan and car-ownership period are well matched, the loan should be paid off by the time you sell the vehicle, or at least paid down enough that the balance can be covered by the proceeds from selling the car.

Obviously, the easiest way to ensure this can happen is to keep the car until after the loan is paid off. From a purely financial perspective, the best strategy is to keep each vehicle for as long as possible. Car depreciation is rapid in the first few years, then slows. So the more frequently you buy a new car, the more you’ll suffer this initially steep loss in value.

But let’s face it, a new car every few years is important to many drivers.

To avoid an underwater situation, borrow as little as possible. Do that by making a big down payment and resisting the temptation to roll fees and taxes into the loan.

Imagine you bought a $30,000 car, paying another $1,850 in taxes and fees. With a five-year, 5% loan for $31,850, you’d pay $601 per month, according to the sbup Auto Loan Calculator. After three years, you’d still owe about $13,700, nearly half the purchase price.

You might get that much or more on a sale or turn-in, but you might not. If you’d come up with $6,850 when you bought the car, and borrowed $25,000, you’d owe just $10,754 after three years, improving the chances of selling for enough to cover the loan balance. In addition, your monthly payment would be $472, not $601, saving $4,644 during 36 months.

Another strategy is to buy a vehicle more likely to hold its value. lists a number of vehicles that have held their value especially well.

Of course, keeping the vehicle in good shape will enhance its sale or turn-in value. Keep records to prove you’ve had all recommended maintenance performed, including oil and transmission-fluid changes and belt and hose replacement. Consider covering the seats, and keep the car clean, as dirt and grime will damage the finish.

Finally, shop around for the lowest auto-loan rate you can find. This makes sense anyway because a lower rate will reduce your interest charges and monthly payment. But a loan with a lower rate will also reduce your balance more quickly, since more of each month’s payment goes to principal.

If the $31,850 loan discussed above charged 8% instead of 5%, the loan balance after three years would be $14,279 instead of $13,700. And the payment would be $646 a month instead of $601, costing you $1,620 more over 36 months.

Use the search tool to dig up the best auto loan. The Auto Rebate vs. Low Interest Financing calculator can help you figure whether it’s best to get the vehicle for a lower price or to pay a bit more and get a low loan rate.

—For more ways to save, spend, invest and borrow, visit

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