Reader Question: Should I Pay Off My Car or Trade It In and Lease Another Car?
by Erik Folgate
Filed under Cars, Credit and Debt
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 Craigslist.com 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.
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.
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.
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.