Upside Down Car Loan - or - Rid-a-Car
Can't Make Car Payments
How to Get Rid of Car Payment
What is the best way to go about getting rid of a second vehicle? I have lately begun to loath our 4 year old minivan. We pay $295 a month and will for the next 4 years. We bought it used at 7.75%, we have a pretty good credit rating and are working our way out of $12,000 credit card debt. I've seen friends of mine trade in vehicles they don't own out right and go to newer cars and say that they pay less. I don't see how that can be. I thought any unpaid balance of a vehicle was tacked on to the price of the new vehicle, and would cause higher payments. Others have said to do a voluntary repo. But won't that hurt our credit rating? We aren't behind on payments, and aren't hassled by creditors. I just want to kind of start over and see that $295 as helpful towards other bills to get us out of debt quicker. I feel like we are wasting that money every month, and can't see spending it for four more years. Any ideas would be appreciated.
Yes a voluntary repo will hurt your credit. Creditors look at it as a repo, voluntary or not. The way your friends pay less on a trade is they are right side up on the loan. That means they owe less than it is worth. Most people are upside down on a loan, which means they owe more than it is worth. The best way to get out is to call the financial institution that has the note and find out what payoff would be 30 days from the day you call. To get out of it with out making anything try putting an ad in the paper for that amount, but if you are upside, you can ask more.The other thing you can do is put an extra amount on the loan every month. A friend of mine bought a house with a 30 year mortgage. He figured on a computer program that if he put another $7.00 a month he could pay off the house 5 years ahead of time. It doesn't show as much in smaller loans like a car but it will save interest and time.
Pay Down and Sell It
Two years ago we freed ourselves of our $312 monthly car payment by paying down our loan to the vehicle's blue book value and then selling it back to a car dealership. We used a credit card (but not a cash advance) to come up with the cash for this transaction. The credit card actually had a better interest rate(6.9%) than the auto loan rate(13%).
Yes, we lost money on that one, however, we got out of a burdensome committment without losing our sparkling credit rating. The very best of luck to you.
Pay Off More Quickly
Is the remaining balance that you owe on your minivan more than you could get for selling the vehicle? If so, get the thing paid off as soon as possible. See if paying off the monthly in 2 installments per month (that is 1/2 + 1/2) is possible - it could save you from some of the interest from that month.
If the car is worth enough to trade-in and not have you wallow in left-over debt, wait until the end of the new model year is over, many companies/dealers offer better financing incentives, some as low as 2.9, 3.9. Or - sell the thing and buy a cheaper , used vehicle.
As to the credit card debt - good luck.
Sell It and Buy Cheaper Car
A few years ago we found out we were expecting another child. We had no insurance to pay for the birth, and finances were tight. One day I looked out the window at our two late model vehicles and something clicked.
We sold both vehicles in the paper. We sold them for more than we owed on each, making about three thousand on each. My husband bought an old small pickup for $1,300 and we bought a ten year old minivan for $2,300 (Room enough for kids, dogs and equipment). The stated price on both vehicles was about double what we actually paid. Don't be afraid to dicker.
Not only did we gain cash, we lost two car payments, saving over $550 a month. Because we own our cars outright, we don't have to carry comprehensive insurance. Savings of another $75-90 a month. Also, we live in a state that bases its licensing fees on value. Instead of $280.00 a year per vehicle, we now pay around $60. MORE savings!
Sure, I pay a little more in gas. I actually haven't ever had anything go wrong with my van. Soon we'll trade it in, on one just a few years newer.
I feel great every time I get in. Its paid for! I feel smug everytime I drive by someone in their fancy new car. I can just see the dollars flowing away to payment, insurance, taxes.
A Variety of Alternatives
The person who wants to get our from under her $295 car payment has a variety of alternatives to consider. First do not allow a voluntary repossession. It will not only show as a repossession on your credit report but the car will be sold at auction and the owner will still be responsible for the dollar difference between the loan amount and the price at auction. This amount is called a deficency judgement and will also appear on the credit report.
The first information to obtain is the value of the vehicle. Most public libraries will give you this information over the phone with the model, year and mileage. A private sale may allow this family to come out even or at least minimize their loss. The question about trading the car getting a different vehicle and paying less per month is possible but the bottom line is that in most cases the total cost will be more because they will make the lower monthly payment for a longer period of time. Currently they are paying $295, and with the deal described they would possibly be paying a lower monthly payment but the terms would be for longer than 4 years; sometimes 60 to 72 months, so the total cost will be much higher.
The Equity (or Lack of It)
Does Go Somewhere
They are correct when they point out about their friends trading in a used car they don't own yet and getting a new car for lower payments. The equity (or lack of it) does go somewhere.
Perhaps they had equity in their old car with only one year left on a 3 year loan and traded it into a 5 year loan payment. Or perhaps they leased for 36 months. Either way, if they were indeed "upside down" on their old car, they've simply financed a new car and financed their "negative equity" in the old car -- all included in the new loan. A close analysis would probably show that they are in an even greater negative position now than before.
My advice, think like a businessman would. First, do you need the car? If not, get rid of it! I know it hurts to think that you would need to sell the car and come up with $500 or $1,000 or even more cash to settle the loan, but consider this:
How far under are you? Let's say the car is worth $8,000 if you sell it yourself now. And let's say you owe $10,000. Then you are $2,000 "upside down" or "out of equity" or however you would like to express it. If you sold it now, then you would reach into your own pocket for $2,000. Ouch!
But at $295 per month for the loan plus the cost of insurance, maintenance, fuel and other costs, what would be the amount of cash spent be over the next... say... six months be? Let's say insurance at $125 per month and total maintenance of $150. That would be a cash flow of over $500 over the next six months. Now look realistically at the value in 6 months. If you would be upside down by only $1000, you might say: let's wait, "after all we will gain $1000 in equity!" but the truth is you paid $2500 for $1000 worth of equity. If you don't need the car, get out of it. Take your losses and go!
Again, keep in mind that this argument works only if you don't want to replace the car. That's also why I didn't mention putting gas into the car. If you wouldn't be driving it (needing the car), then gas doesnt matter.
But, let's look at other alternatives. Is there someone who might take over the payments? Very risky here, but consider this. You may have a relative: brother, child, nephew, etc. (I would never, never consider a stranger) that needs a car, and is willing to pay the loan and insurance payments. (Either because they cannot get credit, or cannot come up with a downpayment.)
You may let them pay the loan off (by paying the monthly payments on the loan), pay for the insurance and then let them keep the car at the end. Now don't be greedy about any equity in the car at the end of the loan, after all, you are out of equity right now...
Be sure to check with your insurance agent though! You maintain the policy and make sure that both the loan payment and the insurance premiums are being paid. (Consider collecting the money yourself every month and then paying the loan and premium payments.) And as always, get the agreement in writing.
And make sure they don't abuse the car and lower the value of the car at a rate faster than the loan is getting paid off. You are at risk for this, but your payoff: Continued good credit. You save $2,000. You help out someone in your family.
Needless to say, you had better trust the person you are dealing with. This is no different that co-signing a loan in the sense that your credit is on the line, so protect yourself.
Calculator: Auto Loan Calculator
Car is Only Part of Problem
The way that my husband and I have taken control of our finances in the last two years is by making a bill-paying priority list. When we got married we owed on one vehicle - and had to purchase a more dependable one because my job required travelling. We also had just purchased a home, I had school loans to repay, and we had paid for our wedding and honeymoon on the credit card in order to put the down payment on our home. Talk about stressed and strapped!!
We listed the debts we owed, and how much. We then put them in order of interest rates, highest to lowest. Our credit card was the highest so that was targeted for payoff first. With a little mathematical elbow grease, we recognized that we would save money in the long run by paying that off first - no matter how sick those vehicle payments made us. We dumped every extra cent we could into the credit card payments. Although it is difficult, the effect snowballs. The more we put on the card, the lower the balance, the less we were paying in interest. I would like to say here that my husband and I ALWAYS make more than the principal or minimal payment on any debt we owe. Even if I can only spare $5, that is what we send. Send $5 or $10 extra on the vehicle, but focus on those credit cards. There is light at the end of the tunnel. We have now worked our way down the bill priority list to our house. My school loans are the lowest interest rate, so we will make that our target area once the house is payed off. Best wishes!!
My suggestion would be to sell the van and use the money from it for other purposes. If transportation is needed which the van used to provide, there should be local bus service that would solve the problem.
Take the Next Step:
- Before you buy or sell a vehicle, get all the facts. Edmunds.com will give you what you need to know to make a confident deal.
- Do you struggle to get ahead financially? Then you'll want to subscribe to our free weekly Surviving Tough Times newsletter aimed at helping you 'live better...for less'. Each issue features great ways to help you stretch your dollars and make the most of your resources. Subscribers get a copy of our ebook Little Luxuries: 130 Ways to Live Better...For Less for FREE!
- Learn how to survive a layoff.
- Budgeting when you're behind in your bills
- More help getting out of a car lease
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