How to Get Out of an Upside Down Car Loan
by Erik Folgate
Filed under Cars, Credit and Debt
Being upside down on a car loan is becoming more common every year as car dealerships will finance just about everyone that walks through their door. What does it mean to be upside down on your loan? It is when you buy a car for $20,000, you owe $18,500 on the car after one year, but it can only be resold for $16,000 after one year. So, if you sell the car, then you’ll still be in the hole $2,500 after you sell the car. This is precisely why I hate car loans. Cars will ALWAYS depreciate faster than we can pay them off. As long as they have engines inside them, they’re going to drop like a rock in price.
Car dealers know this, but they don’t care! Car manufacturers have actually found out that they make more money if someone finances a car rather than buys it straight up. Could you imagine a salesman trying to talk you out of paying cash for the car and taking out a loan? It happens all the time, and the really creative salesman will seriously talk people out of it!
If you have a lot of car debt and you want to relieve yourself of a butt load of debt very quickly, then get rid of the flashy car(s). If tooling around in a sweet ride is more important than being financially healthy, then you need to seriously re-evaluate your priorities. Some people might not sell their car, because they do owe more than it is worth. However, if you owe $18,500 and you can sell the car for $16,000, go ahead and do it! If you don’t have the cash to cover the $2,500, then go to a local credit union and apply for an unsecured loan to cover the difference. You can get a loan for this range fairly easily. You’ll still have debt, but i’d rather have $2,500 in debt rather than $18,500.
The rule of thumb is that if you have cars or boats (investments that go down in value) worth 50% or more of your annual salary, then there is a big problem! If you make $70,000 a year and you own a $35,000 car, you have a car problem. If you make $70,000 and you owe $10,000 to $15,000 on a car, then you probably don’t have to sell your car unless you really want to. You could probably pay off the loan pretty quickly if you went crazy about it. The point is that wealthy people don’t put their money in things that go down in value! They put their money in real estate and the stock market. When you do the right things and have a million dollars laying around, then it does not matter if you lose money in depreciation from owning a car. You can afford it!
I’m not so sure about the “car problem.” Having a $30,000 car that will last 250,000 miles is a lot cheaper than having a $20,000 car that will only last 100,000 miles.
These guys are totally narrow minded. It makes sense to by something that is not a bigger pain down the road (i.e. car repairs that suprise you-transmission $2500). How much money will you loose when you can not get to work? I guess none of the people actually giving advice truely cares about the people they are giving it to. That would explain the parent relationship to child. This system is not set-up for everyone to be financially secure and free. It is built for prices to rise as more wealth is gathered therefore offsetting any wealth gain. Learn to tell the real truth and we will not have to look forward to a future of conflict.
I actually busted out laughing reading this. I made 32k a year when I bought my first car for 21k dollars. I loved my new car and enjoyed driving it. It was not just a means to get from point A to point B to me. It was something I was proud of. I was easily able to afford rent, and bills with that “$425″ car payment. I saved up for the $25,000 down payment on my house and bought a house. I still drive that same car 7 years later. IMO it was a great purchase and one of the best buys of my life. Everyone has a different situation and enjoys different things in life. To say I had a “car problem” is a joke and very inaccurate. I normally don’t reply to any of the crap I read on the web, but this one just took the cake. When I bought my car my buddy bought a 6k used car. After having about 5k in repairs done to it he sold it. He went on to buy a 10k used car only to have many expensive repairs pop up. We work most of our lives and I see no problem with spending some of that money I earn to enjoy some of the luxuries in life. I still have money in the bank, I have my house and my family is doing just fine. The rules you set for having “car problems” are a joke and spoken like someone who is trying to justify why they are still driving the car they drove in High School. I do not work all day to watch how much money I have in my bank account. I keep a safe amount in the bank and have fun with the rest.
luckily for me I didn’t end up purchasing a car