Reader Question: Should I Pay Off My Car or Trade It In and Lease Another Car?

Here is a question submitted to me from one of our readers. He is having trouble with being upside down on a car loan. He makes $42,000 a year household income. I will post the question answer it based on what I would do if I were in his shoes.

I have a 2004 Nissan Altima that I am upside down on. I owe $15,800 on it and the Trade in value is $10,500. I went to Toyota Dealer and they are having incentives of $5,000 if you lease a Tundra. I’m looking at leasing a Tundra for 3yrs at a payment of $450-$500 a month. Currently I pay $400 a month on the Altima with a 10% interest rate as you see I’m upside down due to my situation when I purchased the car. I have 3yrs to pay off the Altima or I can lease a Tundra for 3yrs and after 3yrs be debt fee of a car and get out from being upside down. I dont know which way to take on this due to I have a 1986 4runner which runs overall great but If it were to DIE on me in 3yrs I’d be in trouble. So my questions is do a Lease the Tundra and get out of being upside down or do I keep the Altima and pay it off? Please Help me!

Money Crashers Reader, I would not take either options if I were you. Please understand that I am only answering the question based on what I would do if I were in your shoes. First of all, with an income of $42k, you take home about $2500 to $2600 a month. You simply cannot afford to be putting $400 to $500 a month towards a car payment whether it’s a car you own or a car you lease. That would mean that 20% of your household income is going towards a car. If 25 to 30% of your income is going toward rent/mortgage, then that only leaves you 50% left for utilities, house bills, food, gas, insurance, and any other debt payments that you already pay. This car payment is making you feel poor, so do everything in your power to get rid of it. If you only had a year left to pay off the car, then I would say stick with it and try to pay it off early. But, you’ve got 3 years left, so paying it off is not a good option.

As far as leasing a Tundra, I think this is a very bad option. You’re obviously having problems paying the $400 payment, so why would you go and get a $450 to $500 payment? Plus, you’ll need to put money down when you sign for the lease, and you won’t even have a car after 3 years. At least you would own a car after three years if you stuck with paying off the Altima. If I had to choose between the two options that you proposed, I would say stick with paying off the Altima rather than getting the Tundra.

My Solution:
You’re not going to like my solution, but here it goes. If I were you, I would sell the Altima in a private party sale. I looked up the private sale value of your car with the average miles of 53,000, a 4-cylinder 2.5S, and a rating of “good”. The value came out to about $12,000. Put a listing on in the nearest big city to you. If the car is in good shape, I guarantee you’ll have 5 or 6 phone calls about this car within a week at that price. So, you owe $15,800 and you sell the car for $12K, now you have to get the remaining $3,800. Go to your local credit union or local bank and request an unsecured loan for $6,000. As long as your credit isn’t trashed, you should be able to get it. The reason you make it $6,000, is because you’ll use the remaining amount to buy a $2,200, reliable car. Yes, there is such a thing, you just have to know where to find them. You find ugly cars with low mileage somewhere out in the country where Grandma only use it to drive to the grocery store and back. Now, if you are single and you own the 1986 4runner, then you can just drive the 4runner until you are in a position to buy a better car with cash. You did not mention if the 4runner was your wife’s car or not.

What you have done is you have reduced your debt from $16k to either 6k or 4k depending on the 4runner situation. That is a significant reduction in debt. The next thing that you do is go and find a job that pays well based on tips like waiting tables, delivering pizzas, or valeting cars. Work this extra job for 6 to 12 months and knock out that loan. Then, start building up some cash to upgrade to a more reliable and better looking car. If you stick to paying cash for cars, paying yourself, and slowly upgrading to newer cars every year or two, you’ll soon own a nice car without any car payments. Car payments is what got you in trouble, so why would you go out and get another one?

I hope that makes sense. Readers, chime in with your two sense and tell me why you think I’m right or wrong. If you would like to ask me a question about your finances or something that we talk about on moneycrashers, Click Here, and I will research your question and answer it with what I would do.

  • Lazy Man

    I would recommend the same thing. I might suggest looking towards a used Kia Rio, a cheap car that has terrible resale value (so it can be had cheap used). I looked into it and you can get an 2001-2004 for around 3000-5000. You should be able to get at least 8 more years on this car.

    This means that you’d be paying around 500 a YEAR for the car rather than $400 a MONTH. With this savings of over $4000 a year, you should find yourself out of this hole in a little over a year.

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  • The real finance king

    Go and get the tundra. I mean, How ill you pick up honies in a beat up pinto? save more money and in 3 years when the lease is up, you can lease another pimpier car…. is easy sir. new car every 3 years. chics dig it.

  • same old advice won’t work

    I hope you didn’t take the advice completely!

    The first half is true. You shouldn’t buy or lease a new car, however, you should keep and try and pay off the car you have!

    Seriously, buying a cheaper car is not an option most times. So many cars that are cheaper have too many machanical problems which don’t make them worth it. You’ll have invested money into a car that you will have to replace as soon as you’ve paid it off. It’s ridiculous. If your figure out how to refinance and make the car you have cheaper, then sacrifice and pay it off you’ll be better off in the long run. People are obsessed with telling people to invest in cheap products, but what I’ve learned is that, that always keeps you in the position of having to replace and repair which is just as costly! You’re better off investing in quality.

    Look, I got my first good job and could finally afford a car. The first thing I did was invest in a reliable Toyota. Really I couldn’t afford it, but had no choice! In the city I live public transportation isn’t reliable, I had to get to work and my old car broke down. Now, I’m trying to refinance and pay the car off early, but in the meantime because I don’t have to worry about how to make it to work, I’ve gotten a promotion and a raise!

    Now, once I pay this car off, I’m not going to buy another. I can rely on this one for another 5 years I feel, which is great, but buying a new car was the absolute best decision I ever made and I don’t regret it at all.

  • Terri

    I believe what the reader is telling you however the issue with selling the car off craigslist is that the new owner will need the title in order to register it. You wont get the title for a few weeks after the car loan is paid off. The other buyer might not feel comfortable buying a car without a title.

  • Kira

    Many dealerships are willing to roll what’s left of your loan into a new loan. (Usually they try to hide this under a “we’ll pay off your car loan!” deal.) You might be able to work out a deal to essentially trade your car in for a cheaper car and a loan. If you can get $12k from the dealer, there’s $3k left on your car – get a $3-4k car and you’ll end up with a $6-7k loan, which you will have lower payments on because of the smaller amount, hopefully a better interest rate, and also because it will be recast (loan period will be longer.)

    • Nathanael

      I work in the car business, selling cars. Here is my solution. First thing, spend about 3-5 hours each detailing your Altima and the 4runner. Then sell the 4runner on which will give the highest return for it. The detailing should earn you at least $100-300 in higher return. You’d be surprised how much more appealing a clean car is. When someone is upside down in their trade the rule is sell them a new car. When they have good credit and a down payment you sell them a used car. This sounds strange but makes sense considering that used car interest rates are higher. Anyhow, take the Altima and the cash to a dealer and buy a cheaper truck, like a Tacoma. Use the cash to put down, and this will lower the interest rate from the bank. The trade value for the Altima will be higher now that it is detailed and you can haggle them for more on the trade. Haggle them on the price of the Tacoma too and roll over the Altima loan into the cheaper truck loan and you end up with a new truck, a lower payment and a better interest rate. Then, make double payments whenever possible (At least twice a year). A good rule is to use half of your tax return to put toward debt. This will greatly decrease the interest you pay over the life of the loan and will help keep you from becoming upside down on the car. Get the darn thing paid off. Drive it free for a year or two but keep making payments into your savings account just like you were paying for a vehicle loan. You will quickly amass an excellent sum of cash to put down toward the next vehicle of your dreams. You will have instant equity in it because of the money down and you will also score the best interest rate possible! Good luck all.

  • Jeffrey

    My personal opinion is to do neither. Simply let the Altima go back and use your 4Runner. Go to the bank and open a savings account and put $300 a month of the $400 you currently pay in that account. This eases the strain on your current financial issues and if something happens to the 4Runner you have the money in the savings to fix it with, and if nothing happens in the next 3 years you would have about $10,800 plus interest that you could use to buy a better vehicle outright. In my opinion leasing vehicles is just another way for the rich to take peoples money and leave them with nothing.

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  • Markcasa

    Great suggestion..great advice….dont buy what You cant below Your means all ways!

  • Fucku123

    this suckzzz

  • Leisa Dreps

    There are many pros and cons between paying off the car and trading it before leasing another one. Paying-off may lessen your savings in the bank but it can get you out of the debt cage. On the other hand, trade-ins receive less than selling a car but it will make the transaction simpler.

  • Asdfasdf

    terrible advice.
    In tough times keep your car and get a new loan with a lower int rate.
    get more income.
    never get rid of a decent car until you have a CAREER job that pays 45k plus
    keep your cash as well.
    hoard cash.
    pay debt when you can afford to, or write it off.
    claim bk if you have to
    dont compromise your security
    your future
    or your career
    debt is an investment in yourself
    if you go under so be it
    but you’ll always be safe and secure and they cant touch you anyways.

    No truck tho.
    Keep the altima you bot it for a reason: to last forever.
    Get a career going and youll be good to go dude.

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  • jennifer phillips

    Is it ever a good idea to pay off a leased car prior to its scheduled date? My business leased a car and I am thinking of buying it outright rather than leasing it for the scheduled 2 more years. This business expense will help with my 2014 taxes but I don’t know if this is a crazy thing to do.

  • Jose Manuel Cannobbio de la Fu

    Need advice..I’m leasing (1st Year) an
    Acura TSX SE 2014,but is too hard for me..Can I get a cheaper lease yet or what?…Thanks..

  • Mac

    I need advice too!
    So I am financing a used 2005 Chevy Impala. It has about 115000. The car before this broke down and I could not repair, I desperately needed a car but have bad credit- so I went to a dealership specialized for people with bad credit. So the interest rate is extremely high and I’m paying a ridiculous amount of money for the car. I have a new job and the payments are not an issue. This car has a relatively bad trade in value max 2,500. I still owe about 12,000 on the car. Should I trade it in for a lease or to own another car? By the time I pay off the car it will virtually worthless. Please give me some insight

  • Angel De La Rosa

    Please help I recently bought a mini cooper 2014 for 24k and traded my van and recieved 14k in trade. I had to carry 6k to the mini and because of my bad credit they made it a high interest of 18% for 5yr. So my payments are 700 a month and have a annual income of 70k.
    My question is should I pay it off totally or what percentage of it can I pay and move into a better more not so sporty car ? Also I will have the power to pay it totally off due to a settlement I am recieving.

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