The Balanced Spreadsheet-Financial News, Budget Advice, Debt help, Financial Tips, and other advice

November 9, 2009

What do when you car is Under Water

When people decide they are ready to get out of debt, one of the first things they try to get rid of is their nice car with the big stinking payment of $300+ a month.  However, when they get ready to sell the car they realize that they owe more on the car then what they can sell it for.  This is commonly known as “being underwater”.  Some just assume then that they are just stuck with the car until they can pay it off but that is not true as there are some options one can take to get rid of the car loan.  Below are the steps to be taken to get out from a car loan that is underwater.

  1. Determine what the car is really worth-Sites such as Edmunds and Kelley Blue Book are two good sites to get this information.  Enter your cars information such as make, model, year, and mileage and get a value.  Use the private sale price instead of the dealer price.  The dealer price is what a dealer is willing to give you which is at wholesale, while private sale is the retail price and will be higher then what a dealer can give you. 
  2. Determine how much you are underwater-After determining your cars value, find the loan balance from your latest statement and subtract the cars value.  That is how much you will need to borrow to cover the difference.
  3. Line up a loan for the difference from a credit union or local bank-This is the most difficult part of the ordeal and you will need to make sure this part is taken care of before you put the car up for sale.  Getting a loan through the dealer that you bought the car is next to impossible so your best chance is at a credit union or local bank.  If you have your car loan through a credit union or local bank already then they are probably be your best bet to get an unsecured loan because basically they already have one if the car is underwater.  You might have to go to everyone in town until you find one willing to loan you the difference.  The interest rate will undoubtedly be higher but you will have a loan at a fraction of what you would have owed.  If no credit unions or banks will loan you the money, you can always try and put the deficit on a credit card, although that is as a last resort.
  4. Sell the car-After lining up the loan you are now ready to sell.  When you find a buy you will give the buyer the keys and a bill of sale.  You will then take the money from the sale along with the loan money and send them to the finance company.  You will then receive the title in about a week and you will then send it to the buyer.
  5. Pay off the loan as quickly as possible!-The sooner the better obviously.  You will be more motivated then ever now since you will be paying for something you do not even own anymore!

Real example-So using some numbers let us assume you have $20,000 car loan and after doing some research you find out you can sell the car for $16,000.  You go to your bank where you have your financing and receive an unsecured loan for $4,000.  After selling the car for $16,000, you send in $20,000 ($16,000 from the sale and the $4,000 you borrowed) to pay off the car.  A week later you get the title in the mail and go ahead and give it to the buyer.  All you have left then is a $4,000 loan that will be paid off very soon and will give you the cash flow you need to create wealth. 

Hopefully you will never be in this position, but however if you do find yourself under water on your car, just realize that you can get out with a little patience and persistence.

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