The Upside Down Car Loan: How to Get Out
Automobiles represent one of the largest expenditures in our household budgets, second only to housing. The costs of driving a car don’t stop with the monthly payments, but include insurance premiums, gasoline, tires, general maintenance and costly repairs. One of the most significant, forgotten costs of buying a new car is the depreciation expense.
Cars go down in value like a rock (where do you think Chevy got the tagline?). New cars can lose as much as 30-40% of their original value in the first two years, leaving many people owing more than their car is worth (a position often referred to as being in an upside down car loan). If you find yourself in this upside down status chances are your situation could be greatly improved if you sell that “new” car and buy a $2,000-$3,000 used car to get back and forth to work.
The first step in selling an upside down car is to get a good valuation figure to work with. Kelley Blue Book (kbb.com) offers a great online service for looking up your used car’s value, taking into account mileage, options specific to your model, and the overall condition of your vehicle. Be honest with yourself when assessing the condition of your car. If your kid spilled grape juice all over the backseat upholstery don’t list the condition as excellent. You get the idea.
Always look for the “private sale” estimate. You can almost always get more out of your used car selling it to an individual than trading it in at a dealership, or selling it to an auto wholesaler/reseller such as CarMax. Advertise in your local credit union bulletin or newspaper, and stick a For Sale sign in your window when the vehicle is parked.
If you find yourself in the unfortunate position of being in an upside down car loan, consider financing the difference. This is one of the only times you will here me advocate taking on new debt when trying to become debt free. If your car is worth $15,000 and you owe $18,000, it’s much better to sell it and owe $3,000. Yes, you still have a debt associated with a car without having the car, but better to owe $3,000 than $18,000. With decent credit you should be able to finance this difference, and if you don’t have any cash sitting around for another car, you may want to add $1,500-$2,000 to this figure to include your new (used) car.
Bottom line, quit sacrificing your financial future for the opportunity to impress people at a stop light. Seriously folks, a car is four tires and a hunk of metal. They were designed to transport us from one location to another. Despite popular opinion, they don’t make us look any better or make our lives any richer. Remember, Sam Walton, one of the richest men in America at the time of his death, still drove his 1979 pickup truck.
Great tips Frugal Dad. Another great place to look for valuation is NADA. A lot of banks use this one.
Something that you can learn from these valuation reports is how quickly some cars depreciate in relation to others. The all go down, just some do it “like a rock” others like a rock tied to a few balloons!
I remember my mother buying a new car (Pontiac) back in 1982. She drove it for a few days and didn’t like it so she wanted to trade it for another. In just a matter of days, it lost over $4,000 of its value. Result: she drove it a while longer, quite a while longer.
Maybe we need to take your advice and remember that a car is just a tool for transportation and not a fashion statement or a self esteem booster. After a month or so, the “new” wears off, the dash gets dusty, the floor mats have dirt in them, and it’s just another car . . . but with a huge debt burden.
I think the best advice on selling a car that you’re upside down on, is simply this - Don’t. Keep the car till you’re right side up ( paying extra on it every month to speed it up ) . Suck it up and take your blows, and vow not to repeat.
Using the Kelly Blue Book is great advice. We used these estimates when purchasing our used cars to figure out how much the car was worth that we were trading in and how much the cars were worth that we were looking at.
We are sticking to our old beat up junkers for now
It is helping us to pay down our other debts faster and I am grateful to not have to worry about how to make payments. I can’t believe how much people pay for their rides 
[...] you use the same towel twice” “dreams about giving up” “upside down car wreck money” “stop to pick up food” “unusual rustoleum car paint [...]
Hmmmm…I would like to add just one more thought on this post, as it’s a fairly common theme on these frugal living sites.
Usually buying a used car IS a good idea, but as the daughter of a mechanic, I can tell you that most people are woefully ignorant of even the basics of maintenance and upkeep that older cars require.
Older cars just plain need $$$ to keep them running. Not a lot, but it can seem like a lot when you need a new transmisison and the shop is charging you $2500 to replace it…and you only paid $4000 for the car.
If you are handy, grew up around cars or know how to rebuild an engine, then an older car is a good fit and can be VERY cheap to own. If you’re not, or you depend on that car to get you to work, and you don’t have the cash cushion to fix any major repairs, I would urge you to go with a newer car (still not brand new!) and perhaps look into an extended warranty.
That and be nice to your mechanic. Loyalty and decent conversation go a long ways towards saving you money with shop expenses
Shan-Oh - I agree on the not buying used cars part. I couldn’t fix a car if my life depended on it, and i certainly don’t want the added risk of breakdowns. My job doesn’t tolerate late days / missed time from work, and these are things that are a reality with used cars.
But when you buy a new car, research and cash down are your friends. Trading in cars with in equity is not the answer, and will only further your troubles.
[...] debt payments to stay under the 36% rule. A couple credit card payments and/or a significant car payment could easily push them over the 36% [...]
[...] in a couple years I had made virtually no dent in the residual payoff balance leaving me with an upside car loan, or lease in this case. I had exceeded the maximum allowed mileage and sustained the usual dings [...]