The time value of money (i.e. that a dollar today is worth more than the promise of the same dollar at some point in the future) is one of the most important and fundamental principles of economics. As a society, however, North America has recently been re-introduced to TVM’s kissing cousin, depreciation, which has provided an even more painful lesson indeed.
Homeowners, renters, and squatters alike are, by this point, well aware of what it means to possess a depreciating asset. Should they have borrowed some of the money (financed) to pay for said asset, then the subsequent hardship that followed may have even been enough for them to explore the fine print surrounding the “total loss due to fire clause” of their subsequent insurance policies, but that is another story.
Like homes, automobiles are typically one of the largest purchases someone will make, meaning they often will be financed. Unlike a car, however, homes generally don’t lose 15% of their value the very first time you walk in the door and turn on the lights. And while it is theoretically possible to purchase a vehicle that actually increases in value over time, (think hyper-exotic, limited production collectibles, and/or those owned by Puff Daddy, Pete Rose or Richard Simmons – depending on what turns your wheels) the number of such vehicles is so small that it almost doesn’t warrant mention.
Whether you call it being “upside down,” “backwards,” or “under water,” owing more money on your trade than it is worth is such a terribly disappointing scenario, that Adam Smith himself would’ve, no doubt, called it buzz-kill. Like an IRS audit, foot faults, and acid reflux, this is one of those annoying consequences designed to both keep us honest and punish most those who get greedy, like those of us who just have to have a new ride every year or two.
And once the cycle starts, for many there is really is no end in sight. It isn’t as if you are simply “doubling-down” with some sort of shot at having things magically turnaround. With every trade, you get deeper in the hole and just when you thought it couldn’t possibly get any worse, the bottom drops out quicker than Eliot Spitzer’s career or a credit score in default.
I have a theory that ecommerce itself may be somewhat responsible for the reckless attitude where people feel like debt doesn’t matter any more than a criminal charge against a pop-star. When the payment on that new Subaru WRX is just another line item on your monthly bank statement and it all starts to feel like monopoly money, anyway, than you may already be in the fast lane headed for a sure “finaccident.”
My suggestion on putting some reference back into the equation is stop all that online banking and start using cash, for everything. Start by paying all your largest bills with $100s, and if this doesn’t do it, move down to $50’s and so on until you are regularly at your bank taking out wads of singles. My bet is that counting out all of this paper money, in physical form, will make you think twice about how much we tend to throw away on high interest rates and items we may not actually be able to afford.
The next thing to do is pledge to never again let the dealer bury your leftover debt into another car purchase.
That magical short-lived period, maybe even only a day, at the intersection of equity, equilibrium, and finance where you owe precisely the same amount as your trade is worth, should become your new nirvana. Any utility you can get out of the car after that, even if only to maintain four brown patches of grass in your side yard, should feel like pure gravy. And provided your last dealer didn’t convince you that a loan term stretching across two presidencies was a good idea, you might even be able to make it.
If they did, you might want to check out “total loss by natural disaster.”
Buying a second-hand car is not an easy job as you need to know a lot before handing over the money to car dealer. And this is a big investment so no one wants to hand over the money without doing a research.
Posted by: Japanese used cars | January 09, 2011 at 05:10 AM