Trees Full of Money shows us how to deal with a situation where we’re ‘upside down’ on our car loan:
If you can no longer afford your “upside down” vehicle, here is a a better way to get out of your loan:
The most important step in unloading a vehicle with negative equity is to accept the situation for what it is. Saying “if I sell my vehicle now I’ll lose money” is not a plan. The quicker you sell your “upside down” vehicle, the less money you loose due to further depreciation.
The second step in selling an “upside down vehicle” is deciding on a fair market value. Lately, the value of used vehicles has been just as volatile as the stock market or the price of oil. The fair market value of your vehicle may be significantly more or less than used vehicle pricing guides such as NADA and Kelly Blue Book suggest.
Once you’ve established a competitive price, you need to secure funding for the difference between what you owe and what the vehicle will bring.
Once you have met the obligations of your loan, it’s time to do a little marketing and salesmanship. I little effort in the marketing of your vehicle can pay huge dividends.
When you have identified a prospective buyer for your vehicle, be sure to ask your bank how to proceed with the transaction. Each state has different laws so be sure to contact your state’s motor vehicle division as well.
[AJC: If you do want to sell your financed vehicle, I recommend that you read the full post here, as I have only extracted TFoM’s highlights]
But, where is Step 6??!!
It should be the one that says: how do I buy a replacement vehicle?
You see, unlike many things that you may choose to own, a car is probably a necessity … now, that doesn’t mean that you need the best car, but you do need a car that can achieve [Insert objective of choice: get to/from work; haul stuff around the farm; schlepp the kids; etc; etc].
So, what do you do?
Well, you first try as hard as you can NOT to get yourself into a financed vehicle in the first place …
… you see, almost anybody who has a financed vehicle is in a negative equity situation:
– As soon as you walk a new car off the lot it has depreciated 10% to 30%, yet you still owe 100% – deposit + payout costs on the loan,
– If your loan is longer than a year or two, the car is probably depreciating at a faster rate than you can pay down the loan.
If you’re not convinced that you are already ‘upside down’ on your loan, ask for a ‘payout figure’ from your finance company – this is the amount that they would expect in a check today to hand over the title to the vehicle to you ‘free and clear’ – and, get ready to choke! Go on, try it …
So, don’t get yourself into this predicament!
But, if that is the only way that you can get into your first set of wheels (is it really, truly the only way? Or, are you just kidding yourself?!), or you are already into a financed vehicle, don’t sweat it.
Just take a look at your current monthly payments and the payout cost … if you can payout the vehicle and buy a cheaper one with cash, go for it. But, the chances are you will need to hang onto your current vehicle, as long as you can afford the payments.
Now, if you can’t afford the payments and you ARE upside down on the loan (as you surely will be), you will need some help to negotiate your way into handing back the vehicle, walking away from the loan and finding a way to start again. Now, that’s a whole can of worms that you just don’t want to open …
… so, next time you’re thinking of upgrading your car with a nice little “low-interest dealer loan” … don’t 😉