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A friend of mine asked me a question about this topic, which of course meant I had to write an entire article about it. I figured it’s a topic that applies to many people, so here you go!
So you’ve decided that a life of debt isn’t for you.
Congratulations! Good choice. Welcome to the club.
You know the first step to seeing big results is to sell your expensive vehicle, but there’s one problem.
You’re upside down. Way upside down. And it looks like you may not get flipped back over.
Don’t panic! You have some options, and you can still make this work. Here’s how.
What Not to Do
When we’re talking about what to do, it’s important to first understand what not to do.
The reason you’re selling the car (or truck or van or winnebago) is to get out of debt. The last thing you want is to get into more debt because of it. I’m talking about financing another car and adding your current balance. Don’t do that.
A friend of mine owed $24,000 for an $11,000 car, because he kept adding the balance of his previous car to his new loan. Not just once, but four times! A few thousand each time caused him to have a $13,000 balance when he bought the fourth car. Fortunately, since then, he has paid it down tremendously and is working on getting out of debt.
Another thing to be weary of is transferring the remaining balance to a line of credit. Sometimes it makes sense to do a balance transfer. For example, if you know for a fact that you can pay this off in less than 15 months, the Chase Slate (not an affiliate link) is a good option, because it’s the only card I know of that offers a 0% APR on balance transfers for the first 15 months, with a 0% balance transfer fee as well. So you pay nothing extra if you pay it off in 15 months. Of course, this is a risky option, because if you don’t pay it off in time, your APR will likely be double what it was when you were paying your car loan (that’s what Chase is hoping for). It’s also worth noting that your credit needs to be pretty high to qualify for this card.
Now let’s discuss your primary options…
Two Options to Get Right-Side Up
Generally (not always), the loan company will not give you the title until you pay off the loan. So in a normal sale, you would sell the car, pay off the loan with the money you receive, and then get the title within 30 days and hand it over to the new owner. This means that you usually don’t have the option of selling the car, paying off the amount you receive, and then continuing to pay down the loan without the collateral (the car).
In the rare circumstance that you already have the title, you could do what I just mentioned, but you should still check with the loan company to make sure you’re not doing anything illegal that was stated in your contract.
Choose the option that works best for you:
1. Take out a loan on the difference
This may sound counterintuitive, but hear me out. If you owe $15,000 for a $10,000 car, go to the company you’re borrowing the money from (or another company if you need to), and explain the situation. Simply say “I owe you $15,000, but my car is only worth $10,000. I’d rather sell the car and only owe you $5,000.” Most companies will work with you to make that happen. Just make sure your interest rate isn’t way higher on the new loan, to the point that you’re not paying much less overall.
2. Pay down the loan to even it out.
This is a more disciplined approach. You simply pay down the loan until you’re not upside down, then you can sell the car and pay it off. In this scenario, you would basically forget about the debt snowball/avalanche until this was accomplished, because selling the car would be your priority. Then you’ll have all that extra money freed up, from not making the payments anymore, to pay off the rest of your debt.
Either option is going to require you to get aggressive. Start selling everything in your house except your children, unless you can get a high price for them. In that case, you’ll want to…I kid, I kid (no pun intended).
Once you sell your car, you should first celebrate (not by spending a bunch of money!), then do this…
After You Pay it Off (And Your Next Car)
There’s a good chance that you’re planning to get a “little beater car” – that’s what everyone seems to call them – to get you around, usually to work and home. You need to make sure you don’t make another purchasing mistake here.
When my wife and I decided to buy our last vehicle, we were on a mission. We knew exactly what we wanted, exactly what we were willing to pay, and exactly how to walk away if they didn’t meet our needs. This is vital.
I wrote about our entire experience of getting a van that was listed at $8,900 for $2,800. Check out that article.
Remember that your get-out-of-debt car is not permanent. Like Dave Ramsey says “you’re living like no one else, so later you can live like no one else.” It always gave me a sense of pride to drive beater cars while I looked around at everyone else driving brand new cars. I couldn’t help but think of how much they were paying a month.
We’re the ones winning. Driving junk and getting out of our funk.
Buy a nice car later, or just spend money on things that actually matter, and invest intelligently. Your call.
Have you dealt with this or known someone who has? What did you/they do? Share below!