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Edmunds: The worst financial mistake a car buyer can make

Updated: October 23, 2019 05:20 AM

The prospect of paying too much for a new vehicle often fills shoppers with dread, which explains why so many invest hours researching prices, trade-in values and interest rates. But while getting a good deal is important, it does not guarantee immunity from making the costliest financial mistake: purchasing the wrong vehicle and selling it soon afterward to buy another new vehicle.

Edmunds transaction data suggests that people make a hasty change with surprising regularity. In 2018, for example, just over 23% of vehicle trade-ins were 2 years old or newer. Because two years is generally not enough time to hit the break-even point of a car loan, most people who swap cars this early will owe more money on the loan than what the vehicle is worth.

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A COSTLY CHANGE OF MIND

To illustrate how heavy the financial penalty for making such a quick switch can be, consider this fictitious situation in which you bought a new Honda Accord LX in 2017. You spent hours getting price quotes, comparing interest rates and calculating payments. The research paid off: You were able to snag a deal for $20,643, shaving roughly $3,400 from the MSRP of $24,030. Once all taxes and fees were factored in, your "out-the-door" cost came to about $22,700. By most accounts, this amount would be considered a good deal.

But soon after the purchase, you realized you didn't like the Accord and decided that an SUV would be a better fit for your lifestyle. You sell your Accord to the dealership just two years later for a trade-in value of $13,522. That's a full 40% less than the original all-in cost of $22,700 you paid only 24 months earlier. In actual dollars, the Accord value dropped by $9,185.

Although this scenario is fictitious, the dollar amounts are real. The selling price, trade-in amount and effective depreciation percentage in this scenario were based on actual transactions in which 2017 Honda Accord LX models were swapped for newer vehicles in 2019. While a 40% loss is substantial, it is worth noting the Accord holds its value rather well compared to other vehicles in the market.

On the other hand, the effective depreciation amount for a 2017 Ford Fusion SE - a vehicle that tends to lose value more quickly than the Accord - would be 47%. In real dollars, that equals a loss of $11,314 on a vehicle that sold, on average, for $21,713 before taxes and fees.

These significant drops in value on the trade-in will easily outweigh the money saved by diligent price shopping. And what often happens next is that the buyer will roll the unpaid balance of the older car into the new vehicle's loan, making it more expensive and extending the time it will take to gain equity.

HOW TO MAKE THE RIGHT CAR-BUYING DECISION

Our suggestion to avoid making this costly mistake is to be especially thoughtful about the needs your new set of wheels should satisfy. Here are some tips to help you get started:

1. Consider variables that might alter your transportation needs. Is a change in family size on the horizon? Could a move - either home or work - be possible? Ensure your vehicle is equipped to handle not just your current tasks but your potential future needs too.

2. Read expert and consumer reviews. Maybe you've always been loyal to a brand and have never bothered looking at the competition. Reviews from actual owners and experts may point out issues to be aware of or other vehicles that may be a better fit.

3. Make your test drive more effective. Drive the vehicle on a route that allows you to mimic your normal commute. Don't be afraid to ask for an extended test drive. Climb in and out of every seat in the vehicle and test all seat adjustments. Will the back seat have enough room for rear passengers to sit comfortably? How is the visibility? Is it easy to get in and out of the vehicle?

4. Determine the true cost of ownership before making your deal. Investigate anticipated repair rates, maintenance, insurance and fuel costs.

5. Give yourself an easier out. If you're concerned you may need to switch vehicles in the near term, consider purchasing an inexpensive used car or entering into a shorter-term lease instead.

EDMUNDS SAYS: When it comes to car shopping, most of the focus goes toward determining the right price. But ultimately, the best money-saving tactic is to choose the right car and hold onto it. This way will shield you from the brunt of depreciation and negative equity.

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This story was provided to The Associated Press by the automotive website Edmunds. Matt Jones is a senior manager at Edmunds. Twitter: @supermattjones.

Related links:

- How to Test-Drive a Car https://edmu.in/2jkhSnx

- 100+ Tips for Used-Car Shoppers https://edmu.in/2DdxbbY

- How Long Should a Car Loan Be? https://edmu.in/2uZnNr3

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Credits

By MATT JONES

(Copyright 2019 by The Associated Press. All Rights Reserved.)

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