Problem Solver: How To Value A Totaled Car

Or simply make sure that you are borrowing at a rate that makes sense. I purchased a 2004 F150 Heritage in 2006. The cost of the vehicle was approximately $11,500. The payments were $230 per month for 5 years (through the credit union). The loan principal dropped faster than the value of the truck. I still have the truck and KBB says it is still worth roughly $6,000. It is long paid for and still working hard. Not bad for an 8 year old truck.

IIRC the GAP insurance added about $250 to my loan, spread out over 5 yrs unless I just wanted to pay for it up front. That is less than $1 per payment, and eliminates any concern of being upside down on my car ever. If you paid cash for a car and total it, you take 100% of the hit for any depreciation; if that is more than $250 then GAP insurance wins. I understand that your logic is to buy older cheaper cars so there is less risk, but $250 is hardly enough to worry about. With today's interest rates I would rather hold onto my cash.

Thanks for your well thought out replies, and for hitting the nail on the head. While I personally have a totally debt free philosophy (though I am currently paying off crappy old debts from my less responsible days, I don't and won't go into any new debt), I understand that a properly negotiated loan is a valid way to do business in this world. mnm4ever sums it up perfectly, you just need to make sure that you wont be "upside down" on your car loan. PDan's story brings up another aspect of this topic, I think. A lot of people are constantly trading in/trading up, which can turn a good loan into a scary one in a hurry. Either that or people are taking long term loans with small payments and as you guys said, the car loses value faster than the loan. Obviously this can lead to trouble and I guess people just have to really question things like how long they expect to keep the vehicle vs. the terms of the loan. PS: Not trying to preach on debt vs debt free, its just where I am in my life, so my comments tend to reflect it.

@mnm4ever I think GAP coverage just insures the difference between the loan and depreciated value, and not the depreciation itself. I understand you preferring to hold on to your cash, but paying cash does have its own rewards. It goes without saying if you're a business owner, self-employed or generally lack a guaranteed paycheck.

@DenverMike - Excellent point of the difference, you are completely right. And I am by no means saying that paying cash is bad, I completely understand where it can make sense, especially in the situations you described. Hell, I was thrilled to not have a car payment at times we have paid off our cars, it is a nice feeling even when you have steady paychecks coming in. My only point was that the need for GAP insurance is a pretty small cost compared to all the other factors in buying a (typically) depreciating asset like a car. And depending on the timing, you could lose out on a lot of money in a cash situation compared to a finance or even a lease.

@davefromcalgary "A lot of people are constantly trading in/trading up, which can turn a good loan into a scary one in a hurry." Actually, many of those people are no longer doing the trade and loan roll-up since the credit crash. They thought that they could do that with their homes also but it didn't quite work out. I have some former relatives who were notorious for rolling loans into new vehicle payments. Somehow the couple finally did the math, realized how upside down they were, and to my knowledge, have been digging out of the big hole (Dodge Ram 3500 with flatbed for his welding business and a Lincoln Navigator for her /child transport) for about the last five to six years sticking with those last two overpriced vehicles even with fuel prices spiking upward.

@mnm4ever I don't recommend 'always paying cash' for a car, except that it should reflect your income level, cash or financed. A person paying cash for a $20K car should have another $20K in savings or whatever. Naturally, most will be eyeing $40K cars at that point. Just keep it realistic is all I'm saying, cash or financed. Also $250 spread over 60 mos is at least $4 a mo. A latte either way.

@davefromcalgary Good point about the credit crunch Mr. econobiker. It might be different here in Alberta. Everyone here thinks were "in a bubble" because of the oil sands. Because of this I am still seeing a lot of people locally on the constant upgrade train.

@ DenverMike Another bang on point. Whether a cash or good loan purchase, people need to buy smart, not just with their heart. Seems like TTAC has some responsible people. Me likey.

@davefromcalgary Honestly if I were that underwater on cars, I would find some dishonest way of getting out of it.

@denverMike - once again, very strong point, I totally agree. And yes, you are right, it was about $4/mo, my math skills are showing lol. I was actually thinking $1 a week, but then my fingers typed faster than my brain.