When and How to Get Out of A Car Loan

There is no doubt in my mind that Americans have had a long-standing love affair with motor vehicles.  There's no escaping it, from celebrities to commercials, and even songs that we hear on the radio, cars have become a trophy to most Americans.

So let me ask you, do you see your car or the cars that others drive as a status symbol?  What exactly does it tell you?  In my opinion, nothing!  You see, just because someone drives an expensive car doesn't mean they are financially healthy.  In fact, it could mean quite the opposite, we just don't know.  So why do Americans tend to put so much value in the car they drive?  After all, they rapidly decrease in value and add no real value to your net worth.  In fact, it shouldn't be considered an investment, in my opinion.  So why are we so quick to come up with all the excuses to buy or own a particular vehicle?  I am not sure, but if you are reading this post, it is likely that getting financially healthy is on your mind.

So, let's get some general rules and details out of the way. A good rule of thumb is that the total value of all your motor vehicles like cars, boats, four-wheelers, motorcycles, motorhomes, and the like should not be more than half of your gross annual income. 

Example: Gross Income x 50% (.50) = Max Value of all Motor Vehicles

Now let me emphasize, the formula above is not the maximum amount you should owe on motor vehicles, but rather what they would be worth if you sold them.

If it is more than half of your Gross Income, you likely have too much money tied up in things that go down in value. 

So what are the ways to get out of a car loan?

1) Pay off your loan - While this seems obvious, I want to take some time to discuss car loans. According to Experian's Q4 2019 State of the Automotive Finance Market, longer-term car loans continue to dominate the market. More than 72% of new car loans sold in the 4th quarter of 2019 signed five-year car loan terms or higher; the same number was 62% for used cars. YIKES! I don't know about you, but these are high numbers for things that go down in value. If you were one of those that fell into the statistic, no fear, make drastic sacrifices, and read my steps to get out of debt blog posts, part 1 and part 2. 

If, however, the loan payment is taking too much of your monthly income, it may be time to sell your car, even if you are within the 50% rule of thumb and/or upsidedown, owing more than it's worth. 

2) Sell it! - Listen, I know this may be a tough pill to swallow. So many of us see our vehicle as economic standing, but it's not. In no way, shape, or form are our motor vehicle's stable assets in our net worth, especially when they continue to go down in value. So how should you go about trying to sell your car? 

Research the current value of your vehicle as a private sale on Kelly Blue Book. Based on this research, decide on your ask price. Allow yourself some wiggle room to negotiate but be fair to yourself and the potential buyer. Then advertise - place a for sale sign in the car window, list it on Craigslist, social media sites, or spread the news by word of mouth.

However, if you owe more on the vehicle than it's worth, you are responsible for paying the difference. If you do not have the cash on hand to pay the difference outright, you can work hard to save up the money, or try to get an unsecured loan and add it to your debt snowball. After all, it is better to owe $5,000 on an unsecured loan than $25,000 to a car loan.

**WARNING** - Avoid repossession! 

When your car gets repossessed, you lose all control. The lender will sell your vehicle and will sue you for the difference. Yes! You read that correctly, no matter what, you are still responsible for the balance that was not covered by the vehicle's sale, so hunker down and stay in control. 

But what should you do if you depended on that vehicle?

Buy something much cheaper, something you can afford to pay cash. Use your $1,000 Emergency Fund if you need to and build the fund back up, but remember this is a temporary move while you get out of debt and save up to buy something better. You will feel the pain for a short period in time, but making these drastic steps now will allow you to start building real wealth sooner rather than later.