The Upside-Down Car Loan – Bleck!

Cars. Automobiles. Junkers. Bling. Gas Guzzlers. Tinker Toys.

First thing that comes to mind: “Chaching!”. Car maintenance, cost of the car, cost you pay the dealer. But, I live in California, commute 80 miles a day to work, and have children equates to “I need a car to drive the insane freeways, get to work in 20mph traffic, and will have wheels just incase something happens with the kids”.

Well, here is my issue. I bought a $14,000 car at 15.9% interest. When I finished paying it off, I will have paid $28,000 for the car. Dreadful, right? I know.

(Now I remember why I didn’t refinance! Light bulb moment! My car is upside down. I didn’t have the cash to pay the ‘extra’ on the car. So, I would need to refinance the car’s worth and take out a loan for the ‘extra’. Which would equate to the same, if not more, of an annual percentage rate. Hence the fact I didn’t refinance my car. Glad I figured that out!)

At this time, I owe $11,500 for the car and it is only worth $6,800. I am at a steady rate of owing $5,000 more than the car is worth.

Every once in a while, I began to ponder on my options of getting out of this upside-down car loan. So, this time I decided to search my options and this is what I found:

  • If you have a lot of car debt and you want to relieve yourself of a butt load of debt very quickly, then get rid of the flashy car(s). If tooling around in a sweet ride is more important than being financially healthy, then you need to seriously re-evaluate your priorities. Some people might not sell their car, because they do owe more than it is worth. However, if you owe $18,500 and you can sell the car for $16,000, go ahead and do it! If you don’t have the cash to cover the $2,500, then go to a local credit union and apply for an unsecured loan to cover the difference. You can get a loan for this range fairly easily. You’ll still have debt, but I’d rather have $2,500 in debt rather than $18,500. *I really don’t want to take out another loan. I will have to ponder this one. It’s pay $22K left remaining or pay $5K. The other problem is that I need money for another car. So, that is requesting another $5-$6K on top of the $5K loan. So, it would be pay $22K or $11K?
  • The best advice for someone who is upside down on an auto loan? Hang on to the car and keep on making payments. Keep the car they have, that’s probably their best financial bet. You’ll want to stick out the old loan until it’s paid for or, at the very least, until the amount you owe is roughly equal to the car’s market value. *The amount will never become roughly equal to the car’s market value. At least that I can see. Since, I’ve had the car it has always remained $5K above.
  • You may want to investigate refinancing your auto loan with a home equity loan, which will likely carry a lower interest rate. *Forget the home equity loan. No more loans! And I don’t need anymore New Debt!
  • If you refinance at a lower interest rate and keep your monthly payments the same, you will pay down the loan principal faster. If you can afford it, speed things up even more by shortening the term of the loan and increasing your monthly payments. *Speed things up… this is a possibility to consider. But, I am not sure I can since I am on a ‘schedule’. However, I could always move this up on the Snowball schedule to pay sooner than later.

After looking at my options on paper, this is what I figure: First, I don’t know that anyone would consider giving me ‘another’ loan for $11, 000. Nor do I really want to incur any new debt. I do not think at this time, I will be able to pay-off the extra $5, 000 at the same time buying a used car at approx $5,500 (come up with $10K on my own accord while Snowballing debt?!?!).

It seems my options stands at:

  • Hang onto the car, keep making the payments, and accelerate when possible (not the car, the loan ~ silly)
  • And, Move this up on the Snowball schedule. I really wonder the dent it would make in the interest payments? Will it be significant? I still need to figure that one out.
  • Well, as you can see: Cars can be a nuisance, if you let it. Someone with a Smart Money Mind (according to statistics) would have bought a used car (roughly 2 years old) and paid with Cash.

    So, let this be a hard lesson learned on my behalf. As, this one is my biggest financial blunders. But, now we all are grazing better pastures, right? We will heartily learn from our past mistakes, become debt free, and become Smart Money Minded people rich beyond belief!

    So, what’s is your biggest financial blunder? Or what was your biggest financial blunder? Come on… I know we all have them. :)~

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    7 thoughts on “The Upside-Down Car Loan – Bleck!

    1. Sharon Rose

      Hi there-around 10 years ago, we got a car on a finance loan. after about 4 years, the car was nearly on its last legs and we sold it on for a pittance, but the car loan was still being paid for at least 3years after that, as we had defaulted on loans in 2002. never again will I get a car on finance-I too learnt the hard way! We now buy cars for around £350-£500 cash, with a years MOT and just do this every year! its an option that works great for us!

    2. Green Panda

      I’m in he same boat as you. I had gotten a car loan that was 13.75%. I was upside down for years. I went ahead and decided to use our tax refund and raises t attack it. I’m now down to $1300 on it.

    3. Money Funk

      sharon rose: Ouch! on paying the loan for 3 yrs after you no longer have the car.
      MOT? You're the first person that I have ever heard of doing this tactic; buying a car every year. What an ingenious idea! 🙂

      Green Panda: Great job! Car financing and dealers are evil!

      I think we should sue for dealers taking advantage of the people. Did you know Suze Orman invested $50K in a stock company & lost the money due to the investor dealing in highly agressive stocks. When she started working for that same company, she ended up suing them because she found out it was wrong on the investor's part to not "invest in stocks that were appropriate to the customer's financial goal".

      So, why should car dealers not be held accountable for the same? Hmmm… well, it sounded like a good idea! 🙂

      I bet you can’t wait til that is PIF! You are soooo close. Congrats, again to a job well done!

    4. Budget Mama

      I am in the same exact boat as you are with your car issue. I owe close to 14K on this car and it’s value is 10K on a trade in. One dealer said they would give me 6K on a trade in. I thought about downsizing but then rolling over the leftover balance would cause me to owe more money on the car and because of my credit, I had a high interest rate, so my payments would be sky high because the total balance was so high.

      It’s funny because I came to the same conclusion. So I am keeping the car and just going to try and double up payments next year when I pay down the other debt.

      It was defniitely my worst financial mistake!

    5. Sharon Rose

      Hi there-An MOT is a compulsory UK annual road and safety test that ALL cars have to pass. So, if you can pick up a cheap runaround with a years MOT, fingers crossed you will have a years worth of trouble free motoring!! The one we bought last week has MOT until mid August, it was £350. We sold our previous car for £500, it was a slightly newer model, but the MOT runs out at the end of Dec 08.

    6. Shtinkykat

      My stupidest car decision was getting a lease. At the time, I wanted a new car and I couldn’t afford to buy it. I new I would be “fleased” (as Dave Ramsey would say), but I didn’t care. After paying $15,660, the lease ended in 12/05 and I had NOTHING to show for it. I had the option to buy the car outright for $8k but what did I do? I bought a new car for $25.5k instead! Doh! Since I financed it 100%, I had to pay an insurance that’s similar to PMI. Doh, doh! I was upside down for the past couple of years but since I made an effort to pay an extra $100/month, this was the first year that I’m finally ahead. 😀

    7. FruGal

      I would certainly avoid borrowing against your home in order to repay your car loan. Borrowing the equity in your home should be avoided at all costs – that’s how people end up wondering why they’re in negative equity – and that’s much worse than an ‘upside-down’ cara loan!

      Also, don’t forget to check if you will be penalised for repaying the loan early if you choose to refinance.

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