Upside Down In A Car?

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.

During the counseling session, we develop a written spending plan (budget – start yours HERE) and calculate their Debt Freedom Date (calculate yours HERE).

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:

  1. 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.
  2. 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).
  3. 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!

By using $6,000 from savings, 16.7 months were ELIMINATED from the Debt Freedom Date!!!  This person will be DEBT FREE in less than 20 MONTHS!
If this person followed options 2 or 3, here is what their Debt Freedom Date will look like.
By obtaining a $6,000 loan and selling the car, this person ELIMINATED $13,000 worth of debt and will achieve Financial Freedom 11.4 months SOONER!!!!
Selling a car can many times be THE CATALYST to achieving Debt Freedom!
Are you going to get rid of your "upside-down" car?

1 Comment

  1. Amy on June 3, 2008 at 9:39 am

    What if you are like the rest of the United States and the economy has made it to where you are barely making it and your credit is ruined because of no work, you are struggling just to pay rent and pay for this car you bought when the economy was great and now you don’t think you can make it one more month without fileing bankruptcy, what do you do?

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