How exactly does a car loan work?

Question

I bought a 2007 Toyota Camry last August. It is still appraised at $21,900 in the blue book. However, I have not so great credit so I still owe $28k on my loan from Citi. I have been thinking about trading in my car and getting a used car that is about $13k or so. Is that stupid? Any help would be appreciated. Thanks!

Answer 1

Car loans are simple interest, meaning that for the first half of the loan, you will pay more interest than principal. Your first year of payments will barely scratch your balance owed. After you reach the middle of the loan, then you start to pay down more of the principal balance than interest.

If you trade your car, you will carry all that negative equity into your next car loan, and the next car you buy will also depreciate. This is why leasing is usually a far better option than purchasing if you only keep cars for a max of 3 years. Good luck and you can email with questions.

Here is a small graph of a simple interest loan
http://www.theautoevaluator.net/Resources.html

Answer 2

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Answer 3

It's not stupid if you can't afford the payments! If this is the case, don't trade it in... Sell it privately for its full value. Use that money to purchase the used car, and put the rest towards your loan. You'll still have $19K to pay, but it's less than $28K.

Otherwise, just keep driving the Camry. They hold their value well, so drive it until your loan is around the same monetary value as the car value. Then sell it and pay off the loan... And start fresh!

Answer 4

IT LOOKS LIKE YOU TOOK OUT A HIGH INTEREST LOAN AND YOU ARE MAKING THE MINIMUM PAYMENT ON THE LOAN. THIS IS NOT GOOD. TRY TO GET A BETTER INTEREST RATE FROM ANOTHER BANK OR CREDIT UNION. PUT THE CAR UP AS COLLATORAL. TRY TO GET THE LOWEST INTEREST RATE OUT THERE. MAKE BIGGER PAYMENTS TO THE LOAN.