One of the biggest downfalls in our financial plan is with our cars. We LOVE our cars so much that most of the time we end up taking a punch in the face with them without even knowing it. When we were getting out of debt, one thing we began to realize was how much our brand new cars were killing our financial plan.
New cars lose 60% – 70% of their value in the first four to five years depending on what you drive. Think about this: If you buy a brand new $32k car, it will be worth $11k in 4 years. Here is the visual version: Drive around in your car and once a week throw a $100 bill out the window so you can feel how fast the car is actually going down in value.
To further visualize this, check out the infographic at the bottom of this article. Ouch!
Since we work too hard for our money, we still choose to drive a piece of crap four years after becoming debt free. Furthermore, almost everyone we meet with who needs help creating a better financial plan can start with their cars. The only problem we encounter is what to do when we owe more than the car is worth.
What Should I Do If I am Upside Down with my Car?
If you are upside down in your car, this simply means you owe more than the car is worth. This happens because your loan repayment schedule simply cannot keep up with the pace at which your car is going down in value. In fact, car experts state that a car will lose up to 11% the moment you drive it of the lot! Here is another visual: You just purchased the car for $32k and by the time you get in your driveway it is worth $28k! Could you imagine if we had an investment that was guaranteed to drop that fast? No thank-you!
Step 1: Determine what you owe on your car
This is as simple as checking your statement or calling your loan provider and asking for the “pay-off” amount.
Step 2: Determine what your car will sell for
The number in your head may sound cute, but what is the car actually selling for?
You can look up the value of your car at Kelley Blue Book and NADA Guides to get an idea of what it is worth, however you will have a much more accurate sale price if you look at what your year, make, and model is selling for on Auto Trader and Craigslist. Remember, your car will sell based on the need from a buyer, not based on the estimated value.
Also, you will always get more for your car when selling it private party. Trading it in or selling it to the dealer is going to be quick and easy, however you will do much better if you sell it yourself. Lastly, don’t forget to wash the dang car! Dirty cars don’t sell for as much as clean cars.
Step 3: Determine the difference in what you owe and what your call will sell for
This is the amount you are “Upside Down”. Here is an example: Let’s say you owe $22k on your car but it is selling for $18k on Craigslist and Auto Trader. Then, it is fair to say you are $4k upside down with your car. No need to overthink it, it’s really that simple.
Step 4: Pay off the difference or get a loan
It comes down to two choices: Come up with cash to pay off the difference or get a loan to cover the difference.
If you have the cash to pay off the difference to release the title from the lien holder to the new owner of your sold car, then simply write a check and be done with it. However, most of us don’t have that kind of cash lying around. In fact, 40% of Americans cannot write a check for $400 per a CNBC survey. Therefore, you must borrow the difference.
If your loan is through your local bank or credit union, start there. These smaller banks and credit unions can actually have a conversation with you face-to-face, and are more-than-likely going to work with you. The mega car-lenders can’t possibly do that much thinking or decision-making at once and you are going to end up getting nowhere in a hurry.
But what if my loan is with a big bank?
Your best bet is to sit down and tell your local bank or credit union that you are living paycheck-to-paycheck and would like to pay them off while you still can. Let them know you are simply one disaster away from not being able to pay them at all, and therefore you would feel much better owing them $4k versus $22k.
The answer isn’t always going to be a “Yes” because they’re looking at your credit score and how much debt you already have outstanding to make their decision. However, you won’t know until you sit down and share your story and convince them to approve it.
If the answer is “No”, then start selling
some stuff everything and get a part-time job to save up the difference. If you’re $4k upside down, then do whatever you can to quickly save up $4k so you can get out from underneath this mess. The clock is ticking….remember, cars lose 60% – 70% in the first four to five years.
Step 5: Meet your buyer at the bank
Once you have a buyer, you will need to go down to the bank where you have your car loan. The buyer is going to pay the amount you agreed to at the sale of your car and you are going to pay off the difference either by writing a check or with the loan you were approved for.
Now you owe much less than you did, your huge monthly payments are gone, your higher registration fees are wiped out, and your higher insurance premiums no longer exist! You just took a step in the direction of winning – congratulations.
But what about my “new” car?
You do need a car, but you need a “getting-out-of-debt” car. I always recommend getting a $2k – $3k used car and paying cash for it. If you are completely broke, then you’ll need to ask your lender who you are already borrowing the difference from with your sold car, to lend you an extra $2k – $3k to buy a used car to get you to and from work.
Let’s go back to the scenario where you owed $22k and your car was worth $18k. If you have absolutely no money, you are paycheck-to-paycheck, and feeling buried by your car payment, wouldn’t a $6k loan and a car feel better than a $22k loan and a car? The answer is yes.
I want you to get control of you money, stop living paycheck-to-paycheck, and create a financial plan that gives you tremendous hope for your future.
I know some of you are going to read this and say, “Absolutely now way am I selling my car”.
That’s completely fine, however realize you may be killing your financial future all for a piece of metal and four tires to impress people you don’t really know or even care about at the next stop light. If you are feeling buried by your car payment, there is a way out.
Remember how easy it was to walk in, sign your name, and drive away in your new car? Well if something were that easy to get into, then of course it is going to be painful to fix. However, I promise you it is worth it and I guarantee that one day when you are wealthy and have the cash, you will buy another awesome car and feel great about it! Make it happen.
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