Car Corner
The Math of Trading Down

January 1, 2010
By Scott Lewis

In a down economy it can be hard to find extra money. Budgets get stretched thin, and bills seem to only go up. If you bought a car at the limit of what you could afford, and that did not get easier over time from salary increases and the like (pay cuts, gas price increased, rent increased, groceries increased, etc.) then you are with me.

It is time to act like we are living in a recession. I am tired of the high payments of my 2007 BMW 335i. I am going to trade down, and get something far more affordable.

Like many people I owe more than my car is worth, so I will have to pay out of pocket when it comes time to trade. This will also have the unfortunate side effect of not having any money to put down on the next car. I can expect to be upside down again, but as you'll see it will be for the better.

Ideally I would like to sell the BMW and pay out of pocket to pay off the loan then start over with another car, but I do not have that much cash to bail me out. I also must have a car to drive everyday. So I am going to have to do this in one transaction. By the way, if you do sell first then you are also stuck with the government's scam of paying sales taxes on the purchased vehicle. By doing a trade down in one transaction there will be no sales tax. This means we are forced to buy from a dealer.

Due to how much upside down I am on my BMW, and the amount of money I have available for this, I need the price of the car I buy to stay below $17,000. Next month I am going to cover my choices for this, but for now let's just look at the math.

Below is a copy of a spreadsheet I created for you to use. You can download the spreadsheet here.

Year/Make/Model 2006 Car #1 2005 Car #2
Mileage 44,003 30,080
Purchase Price $15,995 $13,991
Current Loan Balance $32,238 $32,238
Current Trade-in Value (KBB Good Cond.) $23,300 $23,300
Actual Trade-in (negative) -$8,938 -$8,938
Sub Total $24,933 $22,929
Sales Tax Rate 8.00% 8.00%
Sales Tax (if necessary) $0.00 $0.00
Title & License $200.00 $200.00
Total $25,133 $23,129
Max to Difference Finance (KBB retail value) $20,115 $18,345
Difference between price & value $4,120 $4,354
Mandatory Down Payment $5,018 $4,784
Extra Down Payment $982 $1,216
Total Down Payment $6,000 $6,000
Loan Amount w/ $6K down $19,133 $17,129
Monthly Payment w/ $6K down $348.07 $311.61
Loan Amount w/ minimum down $20,115 $18,345
Monthly Payment w/ minimum down $365.93 $333.73
Loan Rate 3.50% 3.50%
Years 5 5

I used real numbers in creating the spreadsheet. The car prices are from two actual cars I was looking at at the time I wrote this article. Here are some points about spreadsheet for you to consider:

  • The highlighted values is the most important. This is the difference between the asking price of the car for sale and its retail value (on KBB). We need this number to be as large as possible. This allows us to get a new loan for more than we pay for the car. Yes, that means still being upside down, but not as bad and with a less expensive car.
  • I hope to have $6,000 cash, so I set that as my limit. The mandatory down payment is the amount dictated by how much we can borrow (base on the retail value) and how much we pay for the car. The bigger this difference the smaller the mandatory down payment. The extra down payment is just the amount to bring it to $6,000.
  • I show to loans, one with the mandatory down payment, and the other with the full $6K down. This is here in case you need to know what the loan would be with the least out of pocket cash.
  • The Three numbers in bold are the only numbers that will change from car to car. The price is what it is. The mileage is needed to look the car up on KBB to get the retail value, which is the max I can finance through my credit union.

The rest of the spreadsheet is simple enough. I guessed at title & license, and sales tax is in there for those of you with equity in your vehicles. It will calculate the sales tax based on the difference between the old and new vehicle.

Feel free to download the spreadsheet and work up some numbers for yourself.

For every used car ad I see I plug the numbers into this spreadsheet. If it causes the down payment to exceed $6,000 I skip the car. This fact alone has saved me a lot of time and trouble doing the math car after car. It takes a minute or two this way. Just look up its value on KBB and enter the three numbers. You will know right away if you can use this plan to trade down yourself. If you have less cash, just adjust the total down payment amount to what you can afford and start looking for cars.

And yes, at the time of this writing my credit union was offering 3.5% for 5 years on used car loans.


That's it for this month. You have the math to determine if you can successfully trade down. Please let me know if you use this. I would like to know it was useful for more than just myself.

Next month I will tell you what vehicles I am looking to trade down to.