Reader Question About Being Upside Down On A Car Loan

Some of my most popular articles with the search engines are my articles about what to do when you’re upside down on a car loan. It’s one of the most searched phrases in the personal financial category. Being upside down on a car loan is extremely easy to acheive given the way cars depreciate and lesser amounts of down payments that people are putting down nowadays. Also, it is has become a very popular practice to roll negative equity into a existing car loan, which only compounds the problem.

Here is a reader’s question about car woes and my advice to her:

I bought a used mini cooper last year that stayed in the shop. I traded it in June, and I was upside down. I got a car with a rebate but I’m still in the hole $9,000. I can’t trade it in because I have no money to put down to bring the balance down. I want to have a debt free car just to get around in right now. I owe $21,000 on my car and I pay $622.70 a month and rent $720 a month, my take home is $4,200 a month. What would be the best thing for me to do, to get rid of this car?

The good news is that even with a $622 car payment, you’re great income allows you to stay above water while paying such a big payment, and you’re going to get through this without too much of a headache. The bad news is that it sounds like you did roll negative equity into another loan, so now you owe much more than the car is worth. First, you need to start getting away from the mentality of always trading in your car to a dealership. Dealerships make big-time money from trades. They know that most people are desperate to dump the car, so they sometimes offer LOWER than trade value. I want you to get this car looking brand new. Pay a $100 to get the car professionally detailed and give it a tune-up. Then, list the car on your local craigslist.com and the local used car circulation. Go to Kelly Blue Book to determine the maximum amount you can list the car for that will still attract potential buyers. Once you’ve found a potential buyer, go down to your local bank or credit union, and ask for an unsecured personal loan for the difference of what you still owe on the car note after selling it plus an extra $2,000 or $3,000 to pay cash for another car. For example, if you can sell the car for $15,000, then you’ll still owe $6,000. Request a loan for $8,000 or $9,000. Now, this is assuming that you’ve got decent credit. If you’re credit is trashed, then this is not the option for you.

Next, look in the newspaper for a reliable, older car that you can buy for $2 to $3,000. You’re looking for something like a 1994 honda accord with decent mileage. What this approach will do for you is a few things. It will reduce your debt load from $21,000 to $8 or $9,000. It will also take away your $622 car payment, and give you a more manageable monthly loan payment. Now, because you make $4,200 a month, you’re in great shape. If you get on a written budget and account for all of the money that comes out of your bank account, you can start paying off the unsecured loan VERY quickly. I’m talking about living on $2,200 a month and paying $2,000 a month. Once you’ve paid off the unsecured loan, you can start saving up money to upgrade to a better used car.

If you don’t like the first option, the second option requires a little more sacrifice, but it can also work given your situation. Tighten up your budget to $2,500 a month, and pay large payments to your $21,000 loan. You should be able to pay off the loan within a year, you’ll have a nice car, and it will be paid off. You’ll free up $622 a month! Think about what you could do with that extra money! This option will take a longer amount of sacrifice with the tightening of your budget, but it will work just as effective as the above solution.

If you have any questions about tightening up your budget, feel free to email me again.

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