|
Let the repo man take the
car?
Dear Debt Adviser,
Our car's transmission is going out. It has 98,000
miles and we are upside down in our loan by $7,000. We're not sure
how we got there and we have no idea what to do. The only option we
can come up with is to get a new car and have this one repossessed.
What would you recommend? How badly would that hurt our credit?
Amber
Dear Amber,
Thank you so much for writing. I am afraid you are about to
drive off a bridge! Whatever you do, do not go out and get another
car loan until you understand the basics of borrowing money to purchase
a car. Second, do not have the car repossessed if you can possibly
avoid it.
The "not sure how we got there"
portion of your question is disturbing and I want to address that
first. Several things could have contributed to your being so far
upside down in your loan. They may have been:
- A loan longer than 36 months. The Federal
Reserve Board reports that the average length of car loans has
risen to more than five years -- an all time high. When you borrow
for that length of time, your monthly payments go down. But it
also means a large portion of your monthly payment goes toward
interest, with very little toward the principal, for the first
three years. That, combined with the car's depreciation in the
first several years, puts most people upside down in a long-term
loan.
- No down payment. A car starts depreciating
the moment you drive it off the lot. If you did not place any
equity in the car through a down payment, you start off your loan
owing more than the car is worth.
- A car with a low resale value. You may have
purchased a vehicle that does not retain its value or is difficult
to sell as a used car.
Now that you know how you got where
you are, let's determine what to do about it.
Your idea is to let your current
vehicle be repossessed and to purchase a new car. Bad
idea!
The following are reasons why that
would not be the best course of action:
- A car repossession on your credit history
is very damaging and would make it very difficult for you to get
a reasonable interest rate on a car loan for years to come.
- Repossessing the car is not the same as repossessing
the debt! Your repossessed car will likely be sold at auction
for even less than it is worth, and you will then owe the difference
between what the car sells for and what is left on your original
loan. In your case, that could be $9,000 or $10,000 -- but whatever
the figure, it certainly will be more than you now owe. Plus repo
fees, interest and maybe legal or other fees. You end up with
a big bill and no car!
A better option that you may want to consider is to
shop around for the best deal to have the transmission in your car
fixed and hold onto the car at least long enough for the resale
value to more closely match what you owe on the car.
The good news is that in general, cars are more reliable
now, so time is on your side. A car with 98,000 miles is not old
for most late-model cars. There still should be many more miles
of life left once you get past this problem. If you do not have
an emergency savings account to tap into for the transmission repair,
make sure you put into place a plan to pay off the expense as quickly
as possible. Also, do not consider this option if paying to have
the transmission fixed is something you cannot afford to do.
Another option is to sell the car yourself for the
best price you can get and come up with a plan to repay the loan
balance. For example, a home
equity line of credit, a loan
from a relative or a personal
loan from your bank or credit union. You also may be able to
save money by refinancing
your existing car loan.
Keep in mind that when you purchase a vehicle to replace
this one, you will need to take into account the payment you will
be making to satisfy the loan balance of your other vehicle. That
may mean that you will have to purchase a less-expensive car than
you may have wanted.
When purchasing a car to replace your existing car,
you will want to choose a car that has a high resale value, is reliable
and that you can afford to finance for four years or less. Consumer
Reports magazine annually lists used cars to avoid and those that
are reliable. If you buy a car that meets these guidelines, you
are much less likely to find yourself upside down in a car loan
again.
Good luck!
The Debt Adviser, Steve Bucci,
is the president of Consumer Credit Counseling Service of Southern
New England. Visit CCCS
for additional debt
advice or click
here to ask a debt question.
|
