Almost every day, I have a financial counseling meeting with someone who has a car loan that has a balance that is much more than the car is worth. They are "upside down". They owe more than the car is able to be sold for.
Let's look at a sample of what I am talking about. Here is a person's Debt Freedom Date calculation.
This person owes $19,000 on a car that is only worth $14,000. They want out of debt! They have had enough! Thirty-six months – THREE YEARS – is NOT good enough! They want to become debt-free now!!!
So how does one get rid of a car that they are upside down on?
There are many options. Here are a few:
- Sell the car and use $5,000 of savings and use it to bridge the "gap" so the car's title is clear for the sale. Use another $1,000 to purchase a "beater" vehicle that will get you from point A to point B.
- If you don't have $5,000 in savings to bridge the "gap", approach the current loan holder. Tell them that you want to get out of debt and are going to sell the vehicle. Obtain a secondary loan for $6,000 ($5,000 for the "gap" and $1,000 for a beater vehicle).
- If the current lender will not provide the "gap" funding, approach your local bank or credit union and obtain a signature loan for $6,000 to cover the $5,000 gap and purchase a $1,000 beater.
If you use $6,000 of savings to get rid of the car and buy a $1,000 beater, your Debt Freedom Date will now look like this!