A few years ago I paid some stupid tax. Suffering from an incurable form of car fever, I went out and financed a late model, used Chevy Silverado pickup truck. It ranks right up there with the dumbest financial moves I’ve ever made. I fell victim to the “I work hard, so I deserve it” line of thinking. I do work hard, but I didn’t deserve it. After eventually wising up I sold the truck, took a $1,000 hit between what I paid for it and what it sold for, and moved on. Since then, I’ve received several letter from the dealership offering to “buy back” my truck.
The Vehicle Buyback Pitch
The letters all have the same tone–because of my superior finance history, and the wise choice I made when selecting a vehicle that has held its value over time, I can bring it back to the dealer where I purchased the vehicle and drive off the lot with a new truck, no down payment required. Sounds like a pretty sweet deal, doesn’t it?
What they don’t tell you in the body of the letter, but reserve for the tiny print in the footer of the letter, is that you also drive away with a brand new, 60-month loan. How nice. Assuming I had kept that truck, I would nearly have it paid off by now, so why would I want to obligate myself to another five years of car payments?
What’s In It for the Dealer?
Dealers are trying all they can to move new car inventory. With the economic downturn, few people can afford the exorbitant costs of a new car, and more and more consumers are looking for used models. The vehicle buyback program is the auto industry’s attempt to replace their new car inventory with more popular used models. But there is a catch. The offer sounds sweet because no down payment is required. You simply hand over the keys, they pay off any remaining balance on your old car, and you drive off in a new car with the same monthly payment thanks to a longer financing term.
The problem is that your current car is probably worth significantly more than the value they quote for offsetting your down payment for the new model. In other words, if you owe $3000 on your current car, but it is worth $12,000 in a private sale, you have $9,000 worth of “equity” in your vehicle. The dealer might require a $2,000 down payment for new cars, but offer to waive that for you in lieu of your trade-in, and pay off your remaining $3,000 loan. To the naked eye it sounds like a great deal, but if you simply sold your existing car for $12,000, paid off the loan yourself with the proceeds, you’d have $9,000 to play with, not the $5,000 (loan payoff plus down payment waiver) they are offering.
Of course, the dealer’s hope is that you take them up on the offer because they can turn around and sell your used car for $12,000 (or more) and pocket the profit themselves. Bottom line? If you like your car, and it is a reliable form of transportation, don’t let some gimmicky sales letter talk you into “trading up.” That is just dealer-speak for going deeper into debt for a longer period of time.