The $6,884 Mistake Nearly 1 in 3 Car Buyers Make at Trade-In

Today, we're going to talk about three things that could affect your money this week.Drug prices, Labor Day, travel costs, and how to spot a fake charity before you donate.

Oh, yeah, it's going to be a great show today. And before we do any breaking down into your car loan, we're going to talk specifically about what you owe on your car versus what your car is worth.So that's going to be a really interesting discussion today.

Yeah.We'll look at why those numbers can get so far apart, what happens when you trade in a car with negative equity, which is the first time I'm learning about this, and what you can do if you find yourself in that situation. Welcome to Becoming Financially Confident. Breaking free from money Shame. One conversation at a time.We're live every Monday through Friday from 11:30 to 12:30pm Eastern.

And Juliet, I don't think we're doing too bad for day two. What do you think?

I think we're doing pretty good.

Yep. My name is Ralph Estep Jr. I'm a licensed public accountant with 30 years of experience.

And I'm Juliet. I'm just like regular person who's going to be asking Ralph all the questions because you might have them, too.

Yeah. And we're very two different. Let me say that 10 times over.We're two very different people having conversation about the things that affect our money and they affect you. Now, I want to start off with some house rules. Number one thing, no shame in anybody on the show about money.Nobody's going to be judged for what they didn't know and the decisions they made yesterday. Today's a brand new day and you're here for us to help you, and.

We want you to be a part of this conversation. So if you have a question that you want us to have a conversation about, send it to us at Becoming Financially Confident Dot com.No question related to personal finance is off limits.

Yeah. Wherever you are on your financial journey, know that you're not alone in this, and we're here to help you Today.

We'll just hop into the headlines right now. Prescription Drug prices fell 3.1% over the past year, which is the biggest annual drop since 1963, a long, long time ago.But if your prescription still costs you $45 at the pharmacy, that headline doesn't feel very meaningful. So what exactly is the number measuring? And why might your own prescription cost the same? Ralph?

Yeah. This is an interesting thing, and I think we need to get into some definition of terms here.And I think we got to Start off with, when they talk about things actually meaning cost or down, what they're looking at is something called cpi, which is Consumer Price Index. So that's a general term about how they measure things and what they're talking about here.It captures what the prices are, but it doesn't necessarily capture what's happening to you when. When you go to the pharmacy to get those prescriptions.

Okay, okay.

So that 3.1% figure is based on a sampled transaction, prices. And that's the thing. It's very complicated because you might be saying, wait a minute, Ralph, that sounds great, or Juliet, that sounds fantastic.But the last time I went to the pharmacy, my price didn't go down. I'm still paying the same copay I was paying before. I still have that same ridiculous deductible. I'm still paying that monthly insurance premium.It's not a reflection of any of those things. It's just the absolute cost of that. Your price is going to depend on your insurance plan. And listen, a lot of people don't know this.It depends on the pharmacy. Every pharmacy sets the pricing for what they want to charge.You know, there's a part of it that says, well, our insurance company will pay this much. But honestly, the pharmacies can set a lot of these prices. I'll give you a great example of this. This is a personal example.About 15 years ago, when I was originally diagnosed with diabetes, I, the doctor prescribed the new medication. And the local pharmacy we had at the time was called Happy Harry's, which is kind of a funny thing, is this guy Harry, and he's happy all the time.It's now been bought out by Walgreens, but I never forget it. The pharmacist called me, and the pharmacist said, ralph, listen, we got this prescription that was sent over by your doctor said, okay.It wasn't an experimental drug, but new to me. And I never forget. She said, and it'll be $770 a month. Whoa. And I said, wait a second, I have insurance. Why is it so much?She goes, well, it's non formulary, it's non generic, all this kind of thing. And I said, okay, well, what does the average person do who can't afford that? And she's, I'm going to give you an idea.She says, if you go to the drug manufacturer's website, you can actually sign up for their affordability plan.

We didn't know that at all.

Oh, I know. You're sitting down. Ready for this one? I went to their Website.

Okay.

And that drug, that was $770 a month, can I guess, signed up for their annual plan. It's now $25 a month.

That's a huge jump.

Yes. And so I said to the pharmacist, I said, well, what would have happened if I just paid the 770? She said, the pharmacy would have made a lot of money.

Right. Because. Oh, the pharmacy, but not the hospital. Right, Right.

I mean, yeah. I mean, not so much the hospital, but the pharmacy. When you're getting prescriptions filled, you can ask, what's the cash price?There's an app out there called Goodrx where you can actually go out there and shop different things. So, again, this is good news from the.From the general standard of where the economy is at as far as prescription prices going, but it's not trickling down to the individual people.

Yeah. Something that I'm learning from this headline is just because it's a. Oh, prices are down.You really have to look into what that is actually covering, because that's not. That's not the number that really impacts, you know, individual people.

Absolutely. You've got to look at what does your insurance plan cover? What is your deductible?There's a whole thing about discussion about formulary versus tiered, generic versus brand.One of the things that I learned very early on, there was a point in our career when my wife and I just started our accounting practice where we didn't have a whole lot of insurance. We had what we call high deductible, you know, if the crap hits the fan, insurance.And so what I would say to my doctor is like, let's talk about these prescriptions. I said, is there a generic? Is there another drug that if I take two pills instead of one, it could save me money?That's the kind of stuff that you should start thinking about doing because you just assume, well, I have insurance is going to cover it, but sometimes that's not the best thing to do.

So I think we learned a lot here.It's just if you go to the pharmacy and you have to take a drug, figure out what all are the other options for the cash price, see if you can get a different brand, a more generic brand. That's what you said. And then hopefully that'll help you keep your costs down.

Yeah.Because one of the things they found in a study is 6 in 10 adults reported being worried about affording their medications, and 4 in 10 said they're skipping or taking less medication because of costs. This is a Big issue.And, you know, I see with a lot of my elderly clients, you know, this is one of the things they said, oh, I can't wait to retire because I'm gonna have extra money. But you know where all their money goes, Juliet, From Medicare. Yes, it really does. It comes to that.

It really does. So, you know, again, if this is something that applies to you, you have to get drugs, you have, like medication that you have to take on the regular.Talk to your pharmacy to find those different options in order to help you save costs that way.

Absolutely. How about we move on to our second headline today? Does that sound good to you?

Let's go. If you're traveling for Labor Day, you're probably comparing how much it costs based on different modes of transportation.Right now, gas is about 90 cents a gallon more than it was over Labor Day last year. And flights and hotels are getting. Also getting really, really expensive.So how should you actually think about the cost of getting away this weekend?

Yeah, that's a tough question. It's a tough question.

Yeah. I was going to ask you, like, how do you calculate when does driving actually make more sense than flying?

All right, so as I get older, that whole thing has changed. I gotta be blunt. There was a point where I was really scared to fly. Like, I was not one of those people that really liked to fly.And I would look for every excuse I can not to fly. So for me, it wasn't even a financial consideration as much as like, okay, I can handle this.But I just went to a conference week before last and I drove to it last year and it was an eight hour drive. This year I decided to fly because I said, you know what, it's just easier.I could lose 16 hours, eight hours down, eight hours back, or I could take a flight and, you know, you still have to get to the airport earlier. But I got on the airplane and the pilot said, oh, we'll be there in an hour and 15 minutes. I'm thinking, wow, right? Hour and 15 minutes.

So it's not just about the cost of the flight, but it's also like, you know, at what age, how is your body going to be able to handle this? Because when I was younger, I used to also drive a lot.There was one year that I wanted to have a nomadic year and instead of flying everywhere, I just drove around the country for a year.

And that sounds fun. Like that's an experience.Like, I've talked to my wife about this, about getting an RV and just selling everything and literally just going on the Road. I guess we could do the live show like that. That'd be kind of fun. You know. Where is Ralph today? Well, Ralph's RV is in Acadia national park in Maine.And then I'd be in the Grand Canyon. But no, and I think that's part of this whole discussion, Juliet, is that it's not just the money side. Of course, the money side is part of this.I'll throw out some statistics here. The average, you know, domestic round trip airfare is up about 2%, which is, oh, big deal, 2%. But here's where they get you.The popular destinations are actually up about 20% year over year. So that's the thing. And this is, this is the airlines understand what they're doing here.You know, they're, they're, they're charging more and I get why they're charging more fuel costs, more airlines, you know, airplane flies on fuel. It doesn't shock me. Yeah, hotel bookings are up 9%. International hotel prices are up 12%. So you've got to really compare a lot of things.You got to compare, because you asked me this question, number of people traveling, how far you're going. Now, I have a rule now, basically, I've set this rule for myself. If it's going to be driving more than five hours, I'm flying.That's kind of what I'm still at,.

Like the, I'm at the six hour mark right now, still.

See, so maybe I could be negotiated up to 6. But yeah, and you also have to be, you have to look at the value of your time. And that's the thing, like, I hadn't really considered.So think about the number of travelers, the distance, what the airfare costs. If you're going to drive, don't think of, don't forget about gas. That's a big one. Parking.

Yes.

Baggage, rental cars, travel time and food. It's funny. I'll tell you a funny story. When we were kids, my dad was one of these people like you, nomad, like to travel.So every summer we did like this cross country travel. And I live in Delaware and I never forget one year we went to Des Moines, Iowa.He was selling life insurance at the time and he wanted to go to like the headquarters in Des Moines, Iowa. And it was like family road trip. Well, family road trip from my dad was you get in the car and you go. You don't stop unless you absolutely have to.

I hate that.

So it was an interesting trip. And my dad was also one of these people that would like pack you know, this is like the old school pack, like the picnic bag.And we would stop long enough on the road till my mom could make the sandwiches and to get back in the car. Let's go, kids.

I'm still very much that, like, if I do long drives, I would rather bring things to cook on my own. Unless there's really, really delicious restaurants where I am gonna go.

Well, that's a good point. So my takeaway here is, you know, pay attention to each of the individual costs. It's not a simple discussion of, well, this costs more. This costs us.Make sure you're looking at all the things and put value in your time. Put value in your health. If you're sitting in that car cramped up for 12 hours or 18 hours.My son just moved from Houston up to New York, and he actually did the drive from Houston to New York twice in a week. And I said, dude, you got, like, so many frequent traveler miles that you. But he's. He said to me, he said, dad, I don't want to do that again.That's a lot of wear and tear on the body.

Yeah. Oh, interesting, Interesting.

So does this change your plans, Juliet? Do you think about travel? Do you change. You think you're going to change things around after the story today?

I mean, it's something that I take into consideration because, like, if you're gonna go international, there's no way I can drive to, I don't know, Japan.

But that might be an interesting drive across the ocean.

I don't know how, Ralph. I don't know how.

You got to get one of those, like, duck boats, you know, like, you drive it on land and then it hits the sand and it becomes a boat. You just keep going. I don't know if I want to take that across the ocean, but.

No, that's how. I already feel nauseous thinking about that. Well, how about that? How about we head into the third headline?

Absolutely.

There are a lot of people who want to help when there's a disaster, and scammers know that. The FTC recently warned about fake charities and people impersonating real charities, often through texts and social media.So if you want to donate, how can you make sure your money is actually going where you think it is?

These are the bottom feeders, aren't they?

They really are. But, yeah, we're going to be talking a lot about scams on this show.This is just like a new one that even recently, I think yesterday, I got a bunch of scam texts like this. How. How can people Protect themselves, Ralph.

Well, I think the first thing is never, ever use the link in a text or a social post to donate. Ever. Start there first. If you get a text, if you get an email, assume it's fake the way you do that. I'm not saying don't be charitable.I'm a charitable guy. I think it's a good thing to do. Find the charity's official website yourself.Now, that's even complicated now, too, because there are a bunch of clowns out here making fake charity websites. So you got to make sure that you're at the charity's official website.

Yeah.

You also have to be cautious if someone asks for a payment by gift card. Like, you know, as soon as somebody says, hey, we're a charity, send us a gift card, Ralph's out of there.If they ask you for a wire transfer, charities are not asking you for wire transfer. Now, if you're donating a couple hundred thousand dollars, that might be a different discussion, but that's not what we're talking about here.And they're never going to ask you to donate with cryptocurrency.So if you get a text, you get an email, or even if you're at what's called the official website and they're asking you for a gift card, if they're asking you for a wire transfer, or if they say, hey, you, you can pay this with bitcoin, run the other direction. That's really scary. It really is.

Yeah. Now, are there websites that we can look up to see whether. How. Like how determine how official a charity is?

Absolutely. We'll give you a couple right now. One of them is Charity Watch, and the other one is give.org there's also one called Charity Navigator.Now, I really like Charity Navigator because one of the things a lot of people don't talk about, and I work with nonprofits and in my accounting practice, one of the things in addition to making sure they're legitimate is understand how the charity uses your money. It's not a headline today, but I just want to park here for a second look at how much of the money actually goes to the programs they're supporting.

Do they information out there?

Absolutely. If you go to places like Charity Navigator, they actually report how much of the dollar that you give actually goes to the end person.What you'll find, unfortunately, a lot of charities have these massive bureaucracies built into them, and the people who are running the charity make a lot of money. I'm not saying they're bad people. Don't Misunderstand me.But when you look at organizations like the one that Stephen Sills has For 9 11, I can't think of the name of it. Tunnels for towers as an example. My wife and I like to support that one.And when you look at the percentage that actually goes to charity, it's a huge number. It's over 90%. And they have to demonstrate that they have an auditing firm that goes in and audits to show where the money's actually going.So not only watch out for the scams, but make sure the charity you're supporting is actually getting the money to the people that need it. Because that's why you're doing it. You're not doing it because, oh, I just really want to help somebody. You want to help them.But if they're not getting the benefit from it, make sure you're looking at that. It's really important.

Right. Okay.So things that I'm learning and, you know, everybody should keep this in mind no matter what kind of scam, not just about charity scams is never hit the link directly from the text or from the social media post. Do a quick search, and then you have charity watch, give.org, charity navigator.And then the last one is be really careful about how you send the money over.

Absolutely. I think it's really important that you do that because, you know, you just have to pay attention to all these things.And unfortunately, we live in a world where it's super simple for these people to do these spoofs to create these fake email addresses. And you'll look at it and be like, this is legitimate, but it's not.The other thing you can do is pick up the phone and call the charity directly and say, hey, I want to donate money. Can you give me your specific charity website? Can you give me your address?You may even go old school and send a check just to make sure you're getting to the right person.

That's true. Good points.

I will. Now, I want to talk about your credit report. And if you haven't checked your credit report lately, it's worth taking a Look.I've spent 30 years helping people understand their money. And the one thing I've learned is that you can't fix a problem that you don't know about. If you can't see it, you can't fix it.And your credit report can affect whether you qualify for a loan and what rate you get. And here's the problem with credit reports, Errors happen.In fact, the Federal Trade Commission found that one in four, customers had an error on at least one credit report that could affect their score. So the first step is simply knowing it's there. And we made an allegiance with a company called WalletHub. They're one of our affiliates.WalletHub gives you free access to your credit score and credit monitor. Using TransUnion data, you can check your score daily and get alerts where there are changes to your credit profile.Now, keep in mind, this is just one particular credit bureau. Different lenders use different scores, but it gives you information. So don't worry about chasing one perfect number.Check your credit report, understand what's affecting your credit, and keep an eye out for changes you don't recognize. If you want to do some business with WalletHub, our affiliate link is becoming financiallyconfident.com wallet.You just go to becoming financiallyconfident.com wallet to get started. Now, we're an affiliate of that, so we earn a small commission if you sign up through that link, but it's no additional cost to you.

All right, this next segment is called the Breakdown. So every single week, we are going to take one big topic and we're going to break it down.Today we're talking about what you owe on your car versus what it's actually worth. Nearly 3 out of 10 trade ins were underwater last quarter with an average gap of 6,884.There's a lot of terminology I'm going to ask you about, Ralph, there, because I've never done this before. In other words, people were trading in cars that were worth less than what they still owed on their loans. So how does this actually happen?What does the math actually look like? And what are your options if you're in that situation? So, Ralph, let's get started. I need some terminology in order to have this conversation.Trade in. My guess about trade in is like, I have a car currently and I want to buy or lease a new car, and I literally traded it. Is that right?

Yeah. So think about it like this. You have car A and you've driven this car to like the.The inside of the car is coming down on your head while you're driving. You got the tire that's constantly losing air. The check oil light is constantly on. And you decide, I've had enough with this car.So you go to the car dealership and you say, oh, look at this new car. I really like this. And the salesperson, yeah, I want to buy that one. And the salesperson says, okay, great, but do you have a trade in?And you Say, well, yes, I'm driving a car right now and I still haven't paid for that car fully yet. So yes, I have a trade in.So basically we're talking about here is you have a car, there's still a loan on that car and you're going to basically swap that car from car A to car B. That's what we're talking about here.

Oh, question here because you did specify like I haven't paid off car A. What happens? What is it called if I have paid off car A and I want to buy car B?

So then you basically are selling your car to buy the new car, which is a great position to be in. And that's when I might not do a trade in.What I have found in my own life is if you own the car outright, yeah, you might be better off selling it what they call third party or private party. You can go on to different websites, list that car for sale, put a for sale by owner, sign in it.Because when you go to the dealership, they are generally not going to give you the highest dollar for that car.So if you don't owe anything on it, then you're better off most of the time to sell it outright and then just take that money and put it towards your loan or pay off other debts or something like that.

Got it. Okay, so next, terminology you mentioned something called underwater. What is that? I'm like, am I swimming? What's happening?

Yeah, sort of. So let me explain this a little bit. I'm going to use a slide here.Now, if you're watching this or if you're hearing this on audio, I'm going to convince you to do something for us.We have a school community and in our school community we're actually going to post whenever we talk about stuff on the show, you'll be able to get that for free. The best way to get to that is you go to becomingfinanciallyconfident.com community. We'll put that in the show notes.But again, that's becomingfinanciallyconfident.com community. It won't cost you a dime. And you can see exactly what we're talking about.But I'm going to pull up a slide here because this is what we're really talking about. Juliet, what we're talking about here is two intersecting lines. Think about it like this.When you go and buy that car, the day you drive it from the lot, that car drops in value and you're going to you. And I've talked About this before, it's not a pretty number. Generally, it drops about 20% in value.So if you buy a $48,000 car, the second that car gets titled, you drive it off the lot. You just lost a ton of money on that car. So here's what happens.As you pay that loan down, the value of that loan, the total balance on the loan falls at a lower, steep or a lower rate than the value of the car. Because like I told you, it just dropped by 20% from the beginning.But at the front end of any loan, the interest is higher at the beginning and it tails off at the end.If you have a five year loan, but we're basically talking about here, excuse me, a 70 month, it takes till about year three to where the amount that you owe is equal to the amount that the car is worth. That period, three years, correct? Yes. And if you do a longer loan, like an 84 month loan, we're talking maybe four years. That's.So that period from day one of delivery up to the point where the value of the vehicle is equal to the loan balance is what we call underwater. The basically what that means is that you owe more on the car than the car is worth. There's a couple things we need to talk about right there.Because if you ever have an accident, when you're underwater, most auto policies will only pay the fair market value of the vehicle. So if you have an accident, it couldn't even, it might not even be your fault.But you have an accident, somebody totals your car and they see the insurance company call, says, hey, Juliet, you're okay. Good, you're fine. But here's the deal. You owe $30,000 on your car, but it's only worth 20 because you're underwater. So guess what happens.You're on the hook for the other.

10 Up to $20.

They're only going to pay you to fair market value, right? So they're going to pay you $20,000. But the loan company says, that's nice, Juliet, but you still owe us 30.That's what I'm talking about with underwater. And we'll talk about this a little bit in the future episodes. There's a thing called a gap policy, and it's called guaranteed value.What it's basically saying is that if you buy a gap policy at the time that you buy the car or right after, it will cover the difference. So let's use that same scenario again. You're in an automobile accident, your main car insurance company pays you 20,000.But if you were wise and bought that gap policy, that gap policy jumps in and pays the difference.

So now which is, which is like if I bought the car at 30,000, that gap insurance would cover the 10,000, which is the difference between 30,000 and 20,000, right?

Correct. Correct. Now, just so we're clear, that gap policy is great because then it's making up the difference. It doesn't help if you go to trade it in.Gap policies don't help you on a trade in. It's only if the car is in an accident and you don't get paid. So if you're going in to buy carby, let's get back to our scenario.You're going to buy a car and you still owe. And here's the interesting thing. The average amount of being underwater right now is just under $7,000 for most people.So they're going into the car dealership to go buy a new car and generally they're about $7,000 underwater. So they have a negative equity. In other words, they owe more on the car than the car is actually worth.

That makes sense.

Positive equity is the thing we talked about a few minutes ago where you actually owe more.So there are positions where let's say that you're very good with your finances and you buy a new car and you put a lot down, so you don't have that position. So then you go into the car dealer and you say, hey, I want to trade in this car. And they're like, well, let's pull what's called a 10 day payoff.Basically they're going to call the lender and say Juliet's here to trade her car in. How much does she owe on this car? Well, Juliet owes $10,000 on the car, but they just told you that car is worth 20.So now you've got $10,000 of positive equity. So you're basically going to sell them the car. They're going to give you the $10,000 either in cash.Most of the time they're going to reduce the amount of the new loan for the new car.

Right.

But again, think about private party because most car dealers are not going to make a deal with you if it's not in it for them. And there's not really a bad benefit for them at that point.

Got it. Okay, so then let's talk about the scenario where I am underwater and I go in and buy a new car. Like what happens at that point?

First thing, first piece of guidance, if you're going to buy a new car, don't Even talk about having a trade in until you make the deal on the car first. What I mean by that is, don't even tell them you have a trade. Here's the thing that's going to happen, right?The people who are salespeople at the car dealership are like fishermen, and they want to set the hook. But they want to set the hook. And this. Listen, they're doing a job. I get it. I bought a hundred cars in the last 25 years.I know what I'm talking about here. But their goal is to get you to buy the car. So this is the usual scenario.First thing they're going to say to you is, what kind of payment are you comfortable with? That's the number one thing they're going to say to you.They're going to see you, like, ogling over this car, and they're going to say, juliet, you could see yourself in that car, couldn't you? And you're like, yeah, I really could. And this says, that's the first thing I said. Oh, they're going to love it.They're going to share the experience. Then they're going to say to you, what's a comfortable payment that you have?Don't ever tell them that, because once you tell them that you're done, because then they know. And they can construct whatever financing they want because they already know your bottom line.Third thing they're going to ask you is, do you have a trade in? So here's what I recommend to anybody buying a car. Don't tell them for number one, pretend like you're not really that interested in a car.Yeah, you can tell them you don't like the color because then you can make a deal on the color they're actually trying to sell you. Number three, don't tell you have a trade in. Negotiate what they call the out the price. Price first. Here's what the car costs.Here's what our incentives are. Here's what you're going to pay. And right before you're getting ready to finalize that, say, you know what? I do have a trade in.And then what they're going to do is they're going to say, yes, this is the game that I like to play. I'll also tell you to show up at the dealership like 15 minutes before they close if you really want to aggravate them.But that's a whole different discussion for another day. Oh, yeah, I can tell you. Stores.

Well, I'm just going to say I love this story because I now Realize I made a mistake at step two. So go on.

So what did you do? Let's talk about that for a sec.

Well, they were so I did not ogle over the car like my latest car. And then, but then when they said, oh, what payment are you comfortable with? I just like made up a number.And then the way I behaved afterwards was, can you get it lower? Can you get it lower? But I think I shot myself in the foot at that point.

And see, here's why that, this is why that backfires on you. Because as soon as they hear that, they can manipulate how much they're going to give you for their trade.They can manipulate the interest rate, they can manipulate the term of the loan. That's a game they can play. But if you negotiate from what is the out the door price? That's where you need to start. That's the big thing.So I would say go into that and just be aware. But then, so then at the last minute you say, oh, I got this trade in.What's going to happen is they're going to say to you, oh come on, I wish you had told me about this trade in the beginning because you've already negotiated your best sales price now. So you got them up against the ropes. So then what's going to happen? And they're going to say, all right, well we got to get your car appraised.And they're going to talk to their used car manager, they're going to come over and kick the tires and look under the hood and all this kind of stuff. And then they're going to come in and say, okay, well tell us what you owe on your trade in. Don't tell them that information yet either.Just tell them, I want you to give me the actual appraised value of what that car is worth. And they're gonna, they're gonna give you a hard time. They're gonna say, but, but we need to know what to trade it or the, the payoff is.Don't tell them that. Okay, say to them, what is it worth? They're gonna give you what it's worth. And then they're gonna, then you can say to them, okay, well I owe X.This is what they call when they get a 10 day payoff. Then all of a sudden then you're gonna have a decision to make.Because then if you're really underwater, and you probably are, the average person's about $7,000 underwater. You have two choices at that point, right? You can pay the difference. Like you can cut A check right then and there. Pay off the loan.They'll pay off their portion, you pay off yours. Or you can do what's called roll the negative equity into another loan. What I basically mean by that is you go from car A to car B.In the scenario we're talking about, let's say you're underwater $7,000. So you go into car B and they finance that additional $7,000 in Car B. So the car B. Absolutely correct. You're rolling that loan into car B.

Okay, so rolling the 7,000 that I have yet left on car A.

Correct. Okay, so I'm going to throw up another slide to give you an example of this.So let's just say that you have an original loan for 70 months and your car payment was $770 a month. Does that make sense so far?

Okay, yes.

Then you go to trade it in, and they say to you, well, you know, you're a little bit upside down in this particular scenario. Again, you can get these slides by going to becomingfinanciallyacombit.com community. We'll put that in the show notes.But if you say, okay, that's fine. Roll that negative equity. In this particular example, I'm using $6884. Roll that equity in.Keep the term at the 70 months, because you feel comfortable with that. Now all of a sudden, that $770 payment that you're used to making now jumps to $890 a month.Because if you think about it, you just added almost $7,000 to the amount that's financed.

And I'm not extending the amount.

Right, you're not extending the term at all.And that's why, See, that's why when they ask you what do you feel comfortable with in a payment, if you had said 770, they're going to go, oh, Juliet's not going to like this.

Okay?

Because now all of a sudden, her payment jumps $120 a month.

Right?

Now, if you can't see this on the screen, the interest on the original loan was $9,754 over the terminal loan. If you do this rollover thing and you keep it at 70 months, your interest now jumps to $11,275. But again, your payment is 890amonth.But see, Juliet already told the salesperson that her cap is 770amonth. So that salesperson goes to the finance guy and says, hey, we want to make this deal. Client is upside down. Juliet's upside down on her car by $6,800.What can we do to keep our payment the same? And the finance guy goes, I've got a great idea. Here's what we can do. We can make that term 84 months. You see what they just did?They took that car loan from 70 months to 84 months. And you're saying to yourself, oh, this is fantastic. This is the best thing ever. This is amazing. Yeah, because now my payments.

I would think that. Because I'm still paying 770.

Right, right, exactly. Your payment's still 770amonth. But if you're looking at my chart, the interest now, the interest goes to $13,668.So by going from 70 months to 84 months, you added 14 months. You added $2,400 and some dollars in additional interest. Now again, you're saying, from a cash flow perspective, I can't argue with that.That seems like the reasonable thing to do. Like, you can only afford 7 to 70amonth. That's all you can afford. So now you understand how it happens.So you have a couple of options, even at that part. You can keep the car and say, you know what, dealer, I'm out of here. I can't afford to do this. This doesn't make sense for me to do this.You go back and get in your car, the ceiling's caving in, the tires jacked up, and you just. I'm not being a smarter, but you got to deal with it, right? This is what happens. The second thing you can do is say, okay, that's fine.They're willing to give me this much on the trade. Maybe I'll try to sell this myself. You can sell it privately, because what you're going to find is most car dealers don't want your trade.They're going to lowball you on that number. You can also go to different car dealers. Carvana, you can call. You go online to nada. Kelly Blue Book, there's a bunch of different ones.You also can refinance it. You. Or like I said, you can roll it into another loan. But just understand, if you continue to do that and a lot. And listen, I'm guilty of this.I'm the accountant who should know better. But many times in the last hundred cars that I bought, I know it's probably not a hundred, but it's a big number.I would consistently roll those things into the next one. But you understand what I'm doing.I'm just pushing this pebble farther uphill and farther uphill, and the interest is Getting bigger and bigger and bigger. And I'm taking the term and making it longer and longer, which is costing me more in the long run. And here's the other scary side of that.So car A, I was upside down, $7,000. So think about car B. I'm so excited I got in this new car. I'm driving off the lot.The car I just bought is worth 40% less because I already had the 7020% first loan. Now I've got the depreciation on car B. So that thing with that steep decline we talked about, it just got worse.It just got worse because not only did you lose 20% on the new car, you rolled $7,000 from the old car. So if you buy a $50,000 car, that's a $10,000 hit plus seven, that's $17,000 that you're losing on day one. And a lot of people don't realize that.So they don't buy the gap policy. They get into an accident and now they owe more than what the car is worth, and they're out of luck.They don't have a car and they didn't have a gap insurance policy. So this is like a nightmare scenario. So I want to talk about this one on today's show because so many people are affected by this.And it doesn't matter whether you're buying a car at the lower end or the higher end. The math works the same on all of these things.

Right. Okay. So I mean, this was a lot of information during today's breakdown.So the scenario really is like, if you're purchasing a new car and you already have a car, just know that you have so many options to figure out how to get the most money bang for your buck, decrease your loans, all of that.

Right.

And so some of the things that you talked about is you can roll over your negative equity. Did I get that terminology right?

Absolutely right. Yeah. You're underwater. You're going to roll that into the second loan.

Okay. So that's one option. Another option is you can keep your car even if it's like breaking in. That's totally fine.Third one is you can sell it privately. And you mentioned a couple of third party like Carvana, CarMax.com.

Another one, Kelly Blue Book.com.

Sorry, Kelly Blue Book.com and then you also mentioned trading it in. I'm trying to remember this. Trading it in is if you go to the car dealership and you trade it in at the dealership. Right.And then you also mentioned refinance. So There is a lot of options if you need to figure out if you want to buy a new car and you want to figure out what to do with your old car.

Absolutely. And I see it's interesting. Duchess of New York, thank you for joining our show today. Put a comment in here. Cars are ridiculously expensive.That is a very true statement, Duchess. Thank you for sharing that. Because you're right. And the prices just keep going up and up and up.So I'm going to tell another story because you know, I love to tell stories. So just picture this. I shared with a lot of people on my previous show that we, we rolled into this show that my mom and dad split up when I was 8.So just picture this. I'm 12 years old. It's probably a Thursday after school. My mom says it's time for us to get a new car, kids. And I'm thinking it's dinner time.She says, so if you come with me. But no, this is the way I was right. She says, you come with me. After we go to the car dealership, we can stop at Burger King.And I'm thinking, oh cool, there's a food incentive here. So my mom had this Honda Accord two door. This thing was a 1980 and we're talking about maybe 20 or 1993. So it's about 13, 14 years old.I mean this car was like we would. My friends, this is a terrible story. My friends and I used to mess with my mom. This car was so small, we'd pick it up and put it in the front yard.Like five of us could carry it across the front yard. That's a whole nother discussion.So my wife, my mom drives us to the dealership and here I am, this fat little 12 year old kid, got my, my little sister, she's three years younger than me and my mom's haggling for this. I'll never forget, she loved this car. It was a Pontiac Grand Am, four door.And I love the idea of four door because there's no more fighting to get in the car. We had that hatchback and, and my sister and I used to fist fight to be who was going to go in the front, who was going to go in the back.

Yeah.

So we get into the car dealership. My mom finds this car she loves. I mean she, she's ogling over this car. She's like. And so the dealers are going, oh, we got a live one here.I could see the guy set the hook. And the second thing my mom did wrong is she told either. And Again, this is 1993. She says to him, I can afford about $300 a month. That was her.That was her cap on payment.

Yeah.

So now she had violated two cardinal rules. And as she violated the third one, and I love my mom. She passed away a few years ago, but she wasn't sophisticated when it came to finances.And then she says, oh, I have this trade in. They looked at this trade in like, you might get 2000 bucks for that lady. Anyway, so we get to the point.She gets to the point, the car that she haggled, negotiated. She gets to the point where she agreed, I'll pay $300 a month for this car.And I'm thinking, great, we're going to get this new car, and Ralph's going to burger king. I'm excited. So, you know, we sitting with the sales guy, Then we get pushed into the finance. The finance guy's office.And the finance guy looks at my mom and says, okay, Mrs. Eastep, we've got everything put together. And I see the bottom line is your payment's gonna be $412 a month.

And she's like, no. I said, 300?

Yeah. My mom looks at me and she's like. And she called me Ralphie. Not a lot of people get away with that. But mom could. She said, ralphie.They told me $300 in the other room. And I said, yeah, what's going on? So I look at the guy and I say, dude, what's going on? He goes, shut up, kid. So my mom's like, an Italian.You don't say to an italian mom, shut up, kid. That's not cool. So my mom goes, wait, wait a second. And she goes, but. But the guy out There told me $300.

Yeah.

And I said, yeah. The dude out there said, $300. And the guy told me, again, this doesn't involve you, kid. Shut up.And I said, well, you're trying to play a game with my mom now. I'm 12 at the time, but I grew up around accounting. My dad's an accountant, so I knew numbers. I. Those are my. My blessing and a curse, right?So I knew numbers.

Yep.

I said, so explain to me why the payment went from 300 to 412.

Yep.

And he finally realized he wasn't getting past this. He was going to have to explain this to me. But what they did was they added the.This insurance, and they added that insurance, and they added an extended warranty, and they added all these things. I said, here's the bottom line. Homeboy, I said, here's what's going to have to happen.My mom is going to pay $300 for this car because you made the deal out there. You figure it out. And he go one of these kind of things.

Yeah.

Well, it turns out they had put her into a longer term. They gave her a higher interest rate because they could. Because she told him what she was willing to pay.

Right.

What did my mom end up paying for the car? $304 Out the door. Oh, but see, this is the thing. Like, you go into there, you have to be armed with the knowledge. That's what this show is all about.We want to give you knowledge to help you make better decisions. I know it's a funny story, but it really happened. And it just shows how you can get taken advantage of by car dealers.So you got to be aware of what you're getting into.

For sure. For sure.

Now, Juliet, a few minutes ago we talked about if you wanted to sell your car outright.And I want to tell you about one of our affiliates because this is one that you really should pay attention to if you're making an arrangement with someone. It's easy to think we both understand what we agree to, like if you're deciding to sell a car on the open market.But putting that agreement in writing can prevent a lot of confusion later. And I've spent many years helping people sort out financial problems, and I've seen different.Two people can remember things completely different even though the same agreement was the same thing. Now, one of the things that you can do is you can go to our affiliate, Law Depot.Law Depot makes it easy to create documents for situations like selling a car privately, lending money to a friend. Don't ever do that. Or to a family member, or renting out a room.They, they walk you through guided questions, and the document is customized based on your state requirements. For example, if you're selling a car to someone you know, it'll help you create a bill of sale. And, and you can put the important details in writing.What was sold, how much was paid, and whether both sides agreed to that. Now, I'm an accountant, I'm not an attorney, so if you need legal advice, go get it.But if you just need a document to put an agreement in writing, Law Depot can help. And we've got an affiliate link with them. Go to becoming financiallyconfident.com lawdepot. We'll put that in show notes.But again, it's becoming financiallyconfident.com lawdepot now, this is an affiliate. So we earn a small commission if you sign up, but it doesn't cost you anything in addition to that.So that's one of the things I would highly recommend if you're going to do a private sale or if you're going to lend money. If you need any kind of legal documents, go to becoming financiallyconfident.com lawdepot.

Before we get into that, I just want to say in our comment for the Duchess of New Jersey. I'm sorry, we called you said you're from New York earlier. New Jersey.

Did I mess that up?

It's okay. The font is super small.

I apologize because I know Duchess Kate. Sorry about that. And thank you for joining in. Kate has two great podcasts.One of them is called the Boomer Bunker and the other one is something about 50 something. It's for people who over 50 who are struggling with weight loss and exercise. We'll put those both in the show notes.But her and John are great people. They do great work. So thank you for joining us today. We truly appreciate that. And sorry that I bumbled that up. I know she's from New Jersey. Yeah.

Isn't there. Isn't there like a fight? But no, there's like a maybe casual rivalry between New Jersey and New York. So, you know.

Yeah. And I just went through there because, like I said, my son just moved to Staten island, so I totally had to drive through New Jersey.Oh, what a disaster. So let me tell one more funny story. So my son moved into Staten Island. So we're leaving at the end of the day. We helped him move.And I'm going down the interstate and I see a fork in the road where I got to go. I want to go south to head back to Delaware.

Okay.

Well, of course, like an idiot, I turned and went north. So I ended up at Newark Airport. Added an hour to my commute. But Newark, New Jersey, is a very interesting place. But anyway, let's move on.How about we do that now? I want to mention something. We forgot something yesterday, and I want to bring that to everybody's attention.So every week we're going to give you what we call homework. Now, this is fun homework. This isn't homework. That's going to aggravate you. But we're almost over today's show.There's one thing I want you to do to help you become more financially confident. And it's a money move that you can make this week and the money move this week.And we're going to check up on this On Friday because Juliet's going to talk about what she's going to do. But your money move this week is to freeze your credit reports at all three credit bureaus. That's Equifax, Experian and TransUnion.And basically what we're talking about there is you go to each of their websites, sign in and you put a hole, you put a freeze on your account.The reason, and we'll talk more about this on Friday, why you want to do that, but it helps you from being a victim of identity theft and you're going to know what's going on. So we're going to check in with you and Juliet this Friday. But Juliet, we talked about this last Friday in sort of our pre line show.Have you moved forward with that at all?

I have not. But I still have time. Like today is Tuesday. I have time until this Friday, which is September 4th. And so I'm going to do it.We're going to talk about it on this show because, because I'm going to be here with the audience. And we really want everybody to do this exercise as well.And so if you didn't watch that pre launch show, I do want to just make it clear because I did ask Ralph this question. Like if you freeze your credit report, does that mean, like if you go to Costco and you spend money on your credit card, do you have to unfreeze it?And the answer is no.The only reason why you would ever need to unfreeze your credit report is if you're asking for like a credit card increase, you're asking for a loan, you're opening a new credit credit line or bank account or anything like that. So you can still use your existing payments to pay for stuff that's not going to affect your credit report.

Absolutely. And let's take a few, we've got a couple extra minutes today.Let's talk about this whole credit freeze thing because I think I kind of laid that out but didn't talk a lot about it.

Okay.

What you're basically doing is you're saying to the credit bureau, if anyone applies for credit, stop them. You're basically putting a stop sign up.I actually have a service where I do that for all of my credit reports so that if I want to apply for the loan, it's super simple. You go to their website, you remove the freeze. So let's just say, for example, we talked about getting a car loan today.Let's walk through this together. Let's say that you do this and you freeze Your credit report on all three credit bureaus, right? Get to the car dealer, you negotiate the deal.You make the best deal you can, and they usher you into the finance manager's office, and he says, okay, Juliet, we need you to complete a credit application. At that point, you say, okay, no problem, but I need to pause here for a second.You get your phone out and you go to the credit bureaus and you unfreeze your account.Because what's going to happen is when that car dealer pulls your credit, when they go to look at the credit agency, if there's a freeze on it, they're going to get a stop sign. No, you cannot do this today.

Cannot.

It's going to say to them, there's a freeze on your credit report. So you can even ask them, say, which credit bureau do you pull? Because they're not going to pull all three. They're going to pull one.So let's just say, for example, you say to the finance person, hey, I'm going to fill out this application right now. Which credit bureau are you going to report? Oh, we're going to go to TransUnion. Fantastic.Get on your iPhone, get on your Android phone, get on your app, and go unfreeze your TransUnion report. Let them pull your credit. Then as soon as you're done with that, freeze it again.Because then if somebody you know who knows what could happen goes out to try to get credit in your name, they get the stop sign. So it doesn't affect you if you're using your credit card. It doesn't affect you. It's only if you're applying for credit.A lot of people don't think about this, but you could be at a store and you want to get a credit increase. Let's just say you want to increase your balance. You're going to have to unfreeze your credit report for that as well.But this is one of the main things you can do to protect your identity, because you're going to know right away if someone applies for credit because they're going to get the stop sign. They can't open an account in your name, because nobody I know is going to open an account without pulling your credit. So that is a huge thing to do.And that's why that's one of the things we really recommend to all of our audience members, is freeze your credit. Because the truth is, it's not hurting you to have it frozen. As long as you understand you have to have a pin number.They might give you, like a passphrase. Or, or a username or password to unfreeze it. But it's super simple and it will save you a ton of, of aggravation and a ton of stress.Because one of the worst things I've ever seen, I've seen this happen to clients so many times they become a victim of identity theft. That is not a fun scenario. And there are, there are companies you can buy to protect you. Like I, for example, I have Norton 360. It's one.I highly recommend.We don't have an affiliate with them as of yet, but it's one of the ones that I use and the cool thing about that is whenever anything hits my credit, when everybody applies for credit, I get a pop up right on my phone right away through Norton 360. Yes, absolutely. That's one of the, it's. It's Norton 360. It's part of. I can't think of Lifelock is what they have. It's Lifelock.It's all part of that same package. It's not cheap. But think about how much aggravation it is when you have when you're the victim of identity theft.Because it, that's the gift that keeps giving and you just have to. And because people will flame your credit really quickly.But if you have it locked down and frozen, that's one of the benefits to why and that's why we're promoting that for this week of your homework. For the week.

Yeah.And something I just realized as you were talking is unfreezing and freezing like that act, if anybody needs to pull your credit is should be really fast. Like they should not be taking. I don't know, it sounds like more than 36 hours to do something like this because that's ridiculous.

Yeah. And what you'll find is most of the time when you say to unfreeze it, if you use the app, it's going to give you a.How long do you want this to be unfrozen for? It'll give you like a 12 hours to 24 hours. 36, 48. Because what a lot of people do is they forget about that.So the bureau's know that and they built this into their model.Now the thing you need to understand Juliet, with a car loan is what's probably going to happen is the car dealer is going to pull your credit and then they're going to shop that loan with different lenders. Each of those lenders is probably going to pull your credit as well. But all of those things are going to happen. Within the next 12 hours.So, because if you know within. I mean, realistically, within an hour, you're going to get a decision, which means that everybody will have pulled your credit.Once you have a decision and once they say to you everything is approved, look at the approval paper to make sure that's actually been approved. Lock that credit back up because there's no reason for anybody to be pulling it.And if the car dealership calls you back and says, well, we ran into a problem with your financing, you say, wait a second, you gave me a piece of paper that says the loan was approved. Here's the interest rate. Now you need to make right on this. So lock it back up. It's a very good thing to do.

Good to know. Well, we are so close to the end of the show today. Is there anything else that you want to talk about?

No, I'm just making sure we don't have any other comments.You know, one of the things that's great about doing this live, one of the reasons I really want to do this live is I want to encourage people to join us live. I see we've got a bunch of people joining us. If you've got a question for this show, feel free to put it into the chat. You can send us an email.You can go to our website.The coolest thing you can do is if you go to becomingfinanciallyconfident.com voicemail, you can actually record a voicemail message and we'll play it on this show. This show is all about helping you make better decisions, helping you break free from money shame. And we want to do that one conversation at a time.That's why Juliet and I are going to do this Monday through Friday. We're going to have a special show on Saturday where we're going to go back and recap everything that happened. But that's our goal every day here.We want to help you make better decisions because we know that this is stressful, it's overwhelming, and it can feel like there's nobody out there to help you. And that's what we want to do every day with the show. So if you've got a question for the show, come join us live on the chat.You know, we're going to be opening up a phone line here pretty soon. There's going to be a lot of ways that you can get in touch with us.

Well, if that's the case, I think we're good for today's show. So that's it for today's episode. Of becoming financially confident.

Yeah. I'm Ralph Eastep, Jr. And I'm Juliet.And again, if you have a question you'd like to talk about it, send it to us@becomingfinanciallyconfident.com and you can explore today's conversation.

You can also join us live tomorrow@becomingfinanciallyconfident.com live.

And again, this is becoming financially confident. Breaking free from money. Shame. As we said, one conversation at a time. And we'll see you tomorrow on tomorrow's show.I hope you have a great day today, Sam.