Q. I recently got a call from my Kia dealer saying that my 2015 Optima is a popular secondhand car. They want to meet to offer me a great price for the car and a discount on the purchase of a new one with 0% financing. My car has just 32,000 kilometres and it’s fully paid.
I wasn’t looking to change, but I thought that if I could get enough money for it, I would buy a new Optima, and then I would have some money handy. (We are renovating our house and cash is tight.) I intend to go and see what they will offer me. Is this something you recommend or not?
— Thanks, Jack in Montreal
A. You would be better off using a line of credit or some sort of equity loan if you have any borrowing ability left instead of taking on additional auto debt—even if you will be able to pay it off slowly at zero interest. Selling a new car after four years, especially Kia, Hyundai or Fiat-Chrysler models that depreciate quickly, is an expensive proposition. You will lose about 60% of what you paid originally. I figure you will receive about $11,500 to $12,500 for the Optima, which has very low mileage and many years of service ahead of it. You would be adding a debt of $30,000 to your balance sheet which could impact the amount you are able to borrow elsewhere.
John Wallischeck, an auto dealer based in Toronto, says that dealer service departments will sometimes “flag” well-maintained low mileage vehicles as prospects for their sales departments. And many auto dealers use “pull ahead” software and prepared scripts to bring in existing customers who never intended to switch vehicles between 30-48 months after their initial purchase or lease. If you buy a new Optima, you can expect the dealership to phone you again in 2021 with a similar story to bring you in early (“Prices are high, your car is a hot colour, we have great promotions that will never be repeated, etc.”).
Managing your auto finances this way with a big loss at the beginning sometimes works if you use the money to pay off a loan running at ruinous rates and downsize, or make an investment, but it’s very expensive. You’ll add about $17,000 of debt (purchase of a new 2018 car less the cheque for yours) to drive home in more or less the same car. The interest savings over seven years compared to market rates is about $6,000. And you’ll pay expensive dealer “upfront charges” every time you trade early. What you need is cash flow, ideally in a way that doesn’t hit you with a big loss up front.
With 84-month financing, you will be “UPSIDE DOWN” for the first 5 to 6 years of your new loan because depreciation is high early in a vehicle’s life. That means your new Optima will be worth less than the balance of your payments until about five-and-a-half years, so you should plan to keep it for the full seven years of the loan.
By the way, prices for used midsize sedans are not high right now; they have cratered because shoppers are migrating out of the segment into more popular sport utility vehicles, as well as the usual seasonal winter slowdown. Kia and Hyundai offer 0% for several months every year, so a similar offer is more than likely to return in the future.
If you’re still curious, try to obtain the following information when you visit the dealership during their “Pull Ahead” or “VIP” promotion and don’t sign on the spot:
- How much for my current car? (This would be a cheque in your name because you want fast cash.) For consumers in Greater Montreal and Toronto, the APA can refer you to a dealer for an on-site appraisal and a second offer that may be higher.
- How much for the new car?
- The all-in monthly payment with taxes and fees for the new car over 84 months. With a zero percent loan, you can perform this calculation easily by dividing the all-in price by 84.
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