How strong is your desire to get out of debt? What are you willing to give up, sell, or live without in order to meet that dream head on? Would you be inclined to sell your beloved car in order to bring your balance sheet back into the black? In many cases, selling your car and going without one, or replacing it with something cheaper, can be a great way to finally pay off your debt.
To help you make this decision, evaluate how much your car is really costing you. To do this, you must think beyond your monthly payment. Sure, your payment may only be $280 a month, but that doesn’t include any associated costs like rising gas prices, car insurance, scheduled (and unscheduled) auto maintenance, and any parking permits or parking fees you have to pay for work or home. Depending on where you live and what you drive, this could add up to a small fortune every month.
Is that amount inhibiting you from paying off your debt? If so, consider selling your car. Or maybe trading in that money-pit would be the way to go for your finances. Whether or not this move makes sense will depend on your car, your habits, and your locale.
Questions to Ask Before Selling Your Car
1. How Much Do You Spend on Gas, Insurance, and Maintenance?
All cars carry at least these three expenses. Some cars are gas guzzlers, while others prefer to sip (e.g. hybrid cars), which means big savings for you at the pump. Insurance can also be significantly more expensive for, say, a red sports car compared to a Volvo station-wagon.
Maintenance is another expense that for some cars can be significantly higher than for others. For example, does your car need specialty dealer-made parts, or are off-brands available? Can you perform DIY car maintenance tips on your own? An analysis of these factors can help you determine how much your car is really costing you, and if it’s worth giving up.
2. Do You Still Owe Money on Your Car?
If you are only one year into a five-year payment plan, chances are that you owe way more on your vehicle than a buyer would be willing to pay for it (i.e. upside down car loan). The minute you drive your new car off the dealer’s lot, you lose thousands of dollars in value.
Find out how much your car is currently worth on a site like Kelley Blue Book or Edmunds. If you sold the car, could you pay off the balance directly out of the sales price? Or would you have to dig into your emergency savings to cover the remainder?
Or is the balance owed completely above and beyond your ability to pay? If you can’t cover the remaining balance without borrowing more money, keep the car and continue to make payments. That said, keep tabs on the value of your car versus the balance on your loan. Once you can come close to breaking even, consider selling the car again.
3. Do You Own Your Car Outright?
When you own your car outright (i.e. you have the title in hand), you can sell it for whatever the market will bear. If it’s worth $5,000 and you sell it for that, will that make a serious dent in your debt? You need to weigh the “reward” you get from paying down or paying off your debt against what you give up by selling your car.
If you have an extra car that sits unused most of the time, or if you can carpool with your spouse, it might be well worth it. On the other hand, if you give up your only mode of transportation to work, it’s probably a bad idea to sell your car.
4. Do You Even Need a Car?
Most New Yorkers can live without a car due to the high quality public transportation system, the walkable commutes, the bike lanes to ride your bike to work, and the constant availability of taxi cabs. Los Angeles residents, on the other hand, find it difficult to get anywhere without their own car because the city is so spread out and public transportation is only available in select areas.
If you live and work in a city that encourages residents to be vehicle-free, why not try it out for a while? And if you still occasionally need a car, check and see if your area has any car-sharing services. These services rent cars by the hour or day and include gas, insurance, and maintenance for a very reasonable price.
5. If You Still Need a Car, Can You Afford a Cheaper One?
Let’s say you sell your car and put the money towards your debt, but you still need a car. Can you afford a smaller, less expensive vehicle using the monthly interest you’ve saved by paying down your debt? If you’d have to borrow money to buy a car again, think twice before selling the one you already own. But if you can sell your car, are able to pay off some debt with the proceeds, and can still afford to pay cash for a cheaper car, then definitely consider selling.
6. What About Lifestyle Considerations?
You don’t want to find out too late that you needed the gas-guzzling Suburban and can’t get along without it. For example, do you enjoy carting your daughter’s entire soccer team, plus gear, to various games and events? Or, do you otherwise need to transport large loads that a 45 mpg vehicle just can’t handle? In addition to expenses, examine how you use your car and how or if you could live without it, or with something different.
Having a nice ride is definitely desirable, and many of us associate our attractiveness and self-esteem with the vehicles that we drive. But if you are driving a car you truly cannot afford, then selling it and going without or just downgrading to something cheaper may be the smarter move than staying in debt. Being free of consumer debt is much more attractive than having a nice car anyway. Plus, your wallet and your psyche will thank you once your debt is gone.