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Stressed out because you're upside down on your car loan? Learn the options you have to escape and how can build up money for your next car!
Options With an Upside Down Car Loan
Last episode we got into car loans. For many couples, those car payments are a huge debt that eats up a big chunk of their monthly budget.
As stressful as it can be, there's another situation that can make car loans even worse – when you owe more on the car than what it's worth, also known as being upside-down on loan.
Upside down car loans are worse because they are loans on a depreciating asset.
You will continue to lose value even as you make your payments. So what can you do when you have a car loan that you're trying to get out of whether it's upside down or not?
Today, I want to go over some of the options you have on how you can escape or at least minimize the damage your car loan is causing you.
In this episode we get into:
- your options to deal with your car loan
- how to decide on what's the best move for you
Hope this helps!
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Resources to Pay Off Your Debt Faster
Tired of being in debt? Here are some resources to help you dump it.
- Best Budget and Money Apps: Personal Capital, Tiller, Mint
- LendingClub <- Instantly see what offers you qualify for
- Jumpstart Your Marriage and Your Money
- 5 Books to Motivate and Guide You to Become Debt Free Faster
- Best Strategies to Get Out of Debt
Refinance the Car
If you want to keep the car and just want the payments to be more affordable, you can try to refinance your car.
This may be a long shot because you have to account for the difference between what you owe and what the car is worth.
However, there are a few ways you can close that gap.
- Sell some stuff
- Get a temp job
- Use your tax refund
- Get a line of credit
If you're able to gather up that money, call up or visit your bank or credit union. Speak with someone at your local branch and see if you can work out a refinance.
Another option is LendingClub. They have flexible terms and great rates.
With LendingClub, you can lower your payments, check your rate in minutes, and instantly see the offers that you qualify for. You can check them out here.
Sell the Car
If this car is a huge debt you're carrying, my advice would be to sell the car. If your budget is already stretched, removing this debt as fast as possible can be a huge relief.
The problem of course that what you sell the car for will most likely be less than what you owe. So what do you do with the difference?
Before you put the car on the market, talk it over with your current loan provider and explain to them that you'd rather owe them a few grand then the five figure debt you're in.
Selling the car means that you have to be able to transfer the title so either they can work with you and get an arrangement made or you may have to go to your local credit union or bank and take out a personal loan to cover the difference.
So what if you have things in place, just how do you sell your car for the most you can?
- Know Your Car and Buyer – Go ahead and picture who would be the most likely person to buy your car. When you put the word out you want to make sure highlight the features that matter most to them.
- Tailor Your Ad – Do you have a Honda Accord? Make sure to emphasize it's reliability and how easy it is to maintain. Got a convertible you need to get rid of? Talk up how much fun it is and how fast it can go.
- Clean Your Car – You'd be surprised at how some people mess up their chances of getting buyers by not cleaning up their cars. When we were selling our old one, I had several people compliment the care I took. People associate clean cars with well maintained cars. Remember how clean it was at the dealership? That's your goal – remove junk, vacuum, and detail it if necessary.
- Make your Pictures Pop – All the words in the world will only get so far. Entice potential buyers by taking great pictures of your car. While it doesn't have to be a perfect sunny day, do make sure the sun is out and your car is looking shiny and new.
- Price Your Car Competitively – Yes, it would be absolutely perfect if you can sell the car for what you owe, but it's likely not going to happen. Instead you're better off putting it out there for a competitive price and having someone snag it sooner rather than later. Kelly Blue Book or Edmunds can help you get a quick assessment of what to offer.
- Advertise – Use websites like Craigslist, Autotrader, and Cars.com to get the word out. Let all of your friends know on Facebook or Twitter that you're selling your car. They may someone who would love to buy it. Don't forget to put a For Sale sign up on your car. It still works.
- Sell it – The last part is one you have to be most careful with. Make sure you follow the terms of your current loan provider and state DMV.
If you have any other suggestions for digging out from an upside down car loan, please send them in.
Building a Car Fund Fast
Even though getting rid of your upside down car loan frees you up of some debt, you may be wondering about your transportation afterwards.
I go into detail on how you can build up your car fund, but if you're pressed for time, you can start off by taking advantage of tax season.
You can try to time things so you get rid of your car loan close to your refund. Even if you have $1,000 you can find a reliable used car.
Start by checking out Craigslist and searching cars by owners. We picked up a great deal on a Toyota from a nearby seller.
Speaking of nearby,tap into your social network and see if anyone is looking to unload a car.
If you're worried about getting lemon, spending a little bit of money upfront can save you a ton down the road.
Grab a CarFax report for the car you're looking into and have your mechanic give it a once over.
Once you have a car to get to work, that'll take a lot of pressure off and you can focus on growing that car fund!
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This episode was originally released in January 2015. Show notes were updated in March 2019.