Should I pay down the negative equity on my old car or save up for a down payment?
I currently have a lot of money invested in my old car (2013 dodge dart with 107,000 miles) and I just put $2,500 into transmission work. The car is worth about $4,000, but I owe about $10,000. Obviously, this is not an ideal situation, but as I get my car back I want to be looking into getting something else right away so this car does not cost me any more money. Would it be smarter to pay down the negative equity on my car, or should I try and save up a couple thousand dollars for a down payment? I made the mistake of purchasing this car when I was a freshman in college, with no guidance or help from my parents.
If you don't pay down your $10,000 loan it's not going to go away by itself. You're going to have to pay that loan off some day, and sooner is better than later. (You don't want to default on this loan because that will wreck your credit rating for years.)
If you buy a new car, how much will you pay each year? If (as I suspect) the payments plus (modest) maintenance expenses will be more than you have to pay to keep the Dart running, then keep the Dart running. Endure. Look on the bright side -- your auto insurance is probably really low compared to what it would be on a new car. Buying this car was an expensive mistake and you know that now. Don't make any more mistakes.
In general, in situations like this one must evaluate the financial aspect separately from the mechanical/operational aspect. For example, if the car is unsafe or is going to cost you a lot of money then no amount of financial engineering is going to change that.
Specific to your question about negative equity versus down payment- you are on the hook for the car loan (Including the negative equity) no matter what and if the interest rate is high then it is in your interest to pay it off as soon as possible. So, if you think the car you own currently is safe to run for a while and is not likely to cost a lot in maintenance then continue using it and pay off the debt as soon as possible.
Depending on the interest rate you are paying, you can also see if you can re-finance it to something cheaper. You could for example get a good rate from a local credit union.
Many car companies have trade-ins and low to zero interest loans- you can ask around to see if you get something for a car that you would want to buy. Understand the terms of the new loan well and that there are no hidden charges and that your trade in value is correctly reflected in the new car financing.
When you do purchase your next car- consider purchasing a used car, it can be a very sensible purchase as an average used car can cost $10,000 less than the average new car. Preferably buy a certified pre-owned car unless you can do your own due diligence on the car.
Many people go out and purchase a car when they are young and they end up in this situation. I know your car might seem like a money pit at times but it is often best to pay off the car and even consider keeping it after it is paid off. If you go out and buy another car then you will start the vicious cycle all over again. A car is depreciating asset. Many wealthy people drive their cars for years and save the money they would have otherwise spent on a newer, flashier car. If you do decide to get something else eventually then you can even try finding something used that you can buy with a low-interest rate loan or something you can pay cash for. This will free up some of your cash flow that you can use to pay bills or to start investing at a young age to get ahead of your peers.
With where savings rates are right now, it's probably better to pay down your car loan debt as opposed to saving for a down payment. Savings rates are still very low and probably do not exceed your monthly interest charge.
Ultimately either one will go towards a new car, but you'd earn less having the money sit in a bank account (and also be tempted to spend it).
I'm guessing you have a terribly high interest rate on the car that is part of the Negative Equity. Now that you've paid for transmission work- if the car is in otherwise good shape the best thing for your long term finances would be to drive this car to death and the get that debt paid down.
If you go the easy route and roll this debt into another new car you will likely fall into a trap of negative equity that many never escape. At this point other than maintenance you car will hardly be depreciating at all, auto insurance and registration will also be cheaper. These three things combined will help play catch up and get your finances back on track.