Upside Down Car Loan


The Problem.

Do you owe more than your car is worth?

A financial coaching client of mine shared an interesting story. I own a Mercedes Benz E class worth $12,000. I owe $24,000. How does that happen? It happened because his self-interested car salesman and dealership happily wrapped the negative equity he had accumulated in his earlier car deal. A deal for a Hybrid that went terribly wrong. The Hybrid cost about $3,000 more than the regular model. My client disliked the car. He overpaid for the car. He got a lousy offer on the trade of the hybrid to the tune of a loss of $12,000. How? Hybrids depreciate their first year at approximately 30%. $24,000 purchase price times 30% equals $7,200 in depreciation. The dealer was able to low ball the trade another $4,800, wrap into the new loan for the Mercedes and Voila! He was upside down for the duration of the loan. That happens when you pay about $50,000 for a $40,000 car that depreciates 50-60% in 5-6 years.

Calculate your negative equity by determining your car’s worth.

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The Solution.

There are several constructive actions you can do to get out of this situation.

· Double your payments to reduce the principal you owe faster than the car is depreciating.

· Pay a lump sum to reduce your negative equity.

· Refinance the car note at a lower interest rate. This depends on your credit history. Do not extend the term of the note or you’ll be upside down again.

· I strongly dislike this answer. If you have equity in your home, borrow just enough to remove your negative equity, pay down the note then sell that car! Then go out and buy a reliable car cash and drive away. It’s not a terrible idea. I dislike it because you are putting the roof over your head at risk. Better to keep the car as collateral.

· Keep paying the current payments until payoff and drive that beloved new car “you had to have” in the ground.

Steer clear of buying another new car requiring financing. Do not be tempted by another new car. You will just repeat the negative credit cycle.

Call Me!

Please contact me and tell me your car financing story. Have you wrapped negative equity? Did the bank convince you to borrow the greatest auto loan amount they thought you could afford? Remember, banks want you to borrow the maximum amount you could pay back. Car dealerships want you to buy the highest priced car on the lot whether you can afford it or not. After you get approved for the financing you really cannot afford, you sign on the dotted line and drive off the car lot, they are done with you. If your car gets repossessed, it's nothing to them. They sold you the car. Done. Banks and Car Dealerships do not have your financial best interest in mind. They have their financial best interest in mind.

Please contact me if I can help coach you in your next car purchase or if you are upside down and want to run the numbers. I can help you.

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Ken Remsen has passed a criminal background screening

Candidate AFC®, Association for Financial Counseling and Planning Education

Member, American Association of Daily Money Managers

Insured, Lloyds of London

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