Falling for the perpetual trap of monthly car payments is a very easy thing to do. Once you get used to making these payments, it is so easy to trade in a perfectly good car for a brand new one as long as the payments are relatively the same. Trust me, I have fallen for this trap several times. I am going to show you the impact of keeping your current car, paying it off and driving it until it drops rather than repeating this expensive cycle. For this example, we will compare keeping a perfectly fine recently paid off 2012 Honda Accord compared to trading it in for a brand new 2017 Honda Accord.
According to CNBC.com, the average amount for an auto loan is $30,032. To create a comparison, I have chosen a 2017 Honda Accord EX-L since its MSRP is very close to the 2016 average auto loan amount. Using an online auto loan calculator such as the one I used from bankrate.com shows that a 60 month loan at .9% APR (Honda is offering special financing until 01/03/2017) for $20,032 borrowed (assumed $10,000 dealer trade for 2012 Honda Accord) will result in payments of $341.56 per month for 5 years. Your continued servitude of making these payments is not all that you are paying for.
You also have to consider the increased costs of insuring the brand new car. Chances are your insurance rates have been steadily falling on your used car. According to Nerdwallet.com’s insurance calculator, a 2017 Accord is about $30 more per month to insure than a 2012 Accord.
If you are registering your vehicle in a state like Nebraska which bases registration fees on the car’s value, you are going to be paying much more per year. Registering your new car is going to cost $500 when it would cost $255 in year 6 for a $30,000 vehicle model year 2012.
You also have to consider sales tax. Lets say you traded in your perfectly fine 2012 Honda Accord and you were lucky enough to get $10,000 for it. You will still have to pay tax on the increased amount of vehicle you just purchased (7% of $20,000) which will require a payment of $1,400.
If you add up all of this over a year, you are looking at a total of $6,113.72 every year.
- Monthly car payment $341.56 times 12 months-$4,098.72
- $1,400 tax bill for the additional $20,000 purchase
- $30/month additional for insurance $360
- $255 additional registration fees to the DMV.
For arguments sake, we can allow $1,113.72/year for needed repairs to the 2012 Accord, which is probably way too generous considering its reputation for reliability. That still leaves at least $5,000! Think of what you could do with this money every year! That is $5,000 added to your savings just for one choice and this does not include the additional money for interest or gains if you invest it wisely. Once your 2012 Honda Accord begins to become unreliable, unsafe or too expensive to repair in relation to its worth, then consider the 10% rule for your next car.