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What to do when upside down on car loan?

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Bgood5
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What to do when upside down on car loan?  Reply with quote  

My fiance has traded her car in several times in a period of a couple years. Each time losing money on her investment to the point of being in the hole roughly $6,000 compared to what her vehicle's actual value is.

We aren't sure the best way of taking care of this. Neither of us make a great amount money, so $6,000 is a pretty big deal to overcome it seems. What would be our best option going forward to take care of this? Should we try to trade or sell her vehicle for something drastically cheaper to make the payments more manageable? Or try to hold onto it until it's finally paid off in approximately 5 years?

Any and all advice is welcome and appreciated. Thank you!
Post Fri Oct 23, 2015 2:07 am
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littleroc02us
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First off I'd have to clear the air and say that a car isn't an investment. Cars are toys or modes of transportation and don't appreciate. In fact they depreciate greatly within the first 3 years. (Almost 40% of their value) Did you also know that most self made millionaires buy used cars that are 3 to 5 years old and pay for them in cash and drive them for 10 years. (Just read the Miliionaire next door)
You mentioned that she keeps trading in her vehicles. That's the worst thing you can do. Why not have a conversation about the only way of getting out of this problem are these two methods:

1. Drive the car for the next 10 years, then it's paid off after 5 years and then for the following 5 years save what would have been the payment and use that money after 10 years to pay cash for a used car.

2. Sell the car for it's private sale KBB market value and take out a low interest loan to cover the 6k deficiency and buy a cheap car for 5k.

Good luck and stop buying cars you cannot afford.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Fri Oct 23, 2015 1:53 pm
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oldguy
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Like littleroc said, you need to keep cars much longer. People get into that Keep Up With The Jones and like to see a new car in the driveway every 4 or 5 years. But that costs BIG money, a $20k car depreciates to $10k in 4 or 5 years. And that $10k loss is "net" money, ie, you need to earn about $14,000 'gross' to have $10k 'net' to pay that depreciation bill.

Most millionaires drive older cars (that's why they are rich, lol). Our newest car is a 2006 toyota mini, it has 187,000 miles on it, we might get a 2016. But no hurry, ours is well maintained and runs great. The depreciation will be about $25,000 ($30k new, we'll sell it for about $5k). That $25k cost is $2500/yr, way less than the $6000 hits that you are taking.

And all modern cars will provide 200,000 miles of trouble-free service - modern engines, lubricants, etc are so much better than they were 20 years ago. The Japanese cars are especially good for long term quality and reliability. (I remember an era when that wasn't the case, during WW2 we had to get engine overhauls on cars at only 60,000 or 80,000 miles - and people were afraid to go 100,000 miles, but those days are long gone).
Post Fri Oct 23, 2015 4:42 pm
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littleroc02us
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By the way I drive a 2008 Ford F150 that has 167,000 miles on it which I need for my real estate and handyman business and my wife drives a 2005 Honda Pilot that has 150,000 miles and drives like it's brand new. I can understand the need to breath that new car smell, but it's def not worth the money.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Fri Oct 23, 2015 8:00 pm
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Bgood5
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Thanks for the advice guys. I understand trading in vehicles frequently is not financially smart. This was mainly done before the two of us got together. The main thing I was hoping to hear was how to best get back on track going forward. I think the two points you mentioned are good and I had thought about trying to sell it outright myself, but I wanted to get some additional input from some more knowledgeable people first.
Post Sat Oct 24, 2015 12:12 am
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