Should You Sell Your Car to Pay Off Debt?

I listen to the Dave Ramsey show sometimes on the way home from work. It airs from 3pm to 6pm in Orlando. I often hear questions from people asking if they should sell their car to help pay off their other debts. There are a couple of things to consider here:

• The owner still owes money on the car, but it is worth significantly more than what they owe
• The owner does not owe anything on the car.
• A significant amount of the owner’s debt is their car loan, so if they sell it, it will speed up their plan to become debt free.

The Answer . . . It Depends

Like many questions asked in personal finance, the answer depends on your situation. Here are two scenarios, one makes sense to sell the car and the other does not make sense to sell it.

Scenario #1: You have $15,000 in debt (other than your house), and you owe $10,000 on a car loan and $5,000 on a credit card. You have $2,000 in the bank, and you could sell the car for roughly $12,000. In this case, your car represents 66% of your debt, and you could buy a $1,500 to $2,500 car after you sold that one to get you from point A to point B. This scenario would make sense to sell the car, because you could be out of debt very quickly, still buy a cheap car, and use that car payment money to pay off the rest of your debt.

Scenario #2: You don’t owe anything on a car that’s worth $5,000, you only have $1,000 in savings, and you have $30,000 in credit card and student loan debt. In this case, it wouldn’t make sense to sell a $5,000 car, buy a cheaper one, and put $3,000 toward $30,000 in debt. That’s only a 10% reduction in your debt. If you’re looking for ways to speed up your debt elimination, think of ways to increase your income.

The point is that it needs to be really worth it to sell the car in order for it to make sense. The only other scenario where it makes sense to sell the car is if you own a car that is worth 50% or more of your income. If you make $40k and you own a $25k car, you need to get rid of it quickly! Even if you’re upside on the car loan, the payment is destroying your budget.

Don’t waste money on cars. So many Americans throw away money to high interest on car loans for cars that aren’t necessary. Nice cars are a status symbol. Do you want to LOOK like you have money, or would you rather have money?