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!