Escaping an Upside Down Car Loan

After I wrote about doing a year end financial review, a reader shared a problem that they were having:

Briefly, here’s the situation. I “inherited” a vehicle from my ex-wife through divorce. She declared bankruptcy and, rather than have the vehicle included in that (it had my name on the lien as well as hers), I took over the payments. The payments are very high [and] are a strain on my budget. I have some options, and that’s where you come in. Which of the three following choices make most sense?

• One, just pay it off and tighten my belt. I have 11 payments left.
• Two, use home equity credit to pay it off, and then pay that off over 20 months.
• Three, use my savings to pay the balance of the car loan off, then try to pay myself back.

I have another vehicle and don’t need this van, though it’s nicer than my car.

Nickel and I both had the same response – that he should try to sell the car and use the proceeds to pay off the loan, dipping into savings if necessary. This is certainly a tough situation, so I wanted to put together some thoughts on making it happen.

Assessing the car’s value

The first step in getting out of your car loan is figuring out what it’s actually worth on the open market. If you price it too low, it’ll sell fast but you won’t get enough for it. If you price it too high, you might not be able to sell it at all.

• Consider the demand for your car. If you’re trying to unload a convertible, you’ll probably be able to sell it for more when the weather is warmer. A family sedan isn’ seasonal, so you may be able to get a fair offer whatever season you sell it.
• Check out Kelley Blue Book as a starting point. But don’t just rely on the numbers from their site. You should also check out local prices on Craigslist, eBay Motors, etc.

Now that you have an idea of what you can get for your car, it’s time to see if you can get a bank to finance the difference.

Handling or financing the difference

While it would be great if everyone could just pay off their loan after selling their car, that’s not always an option. If you have a bit of money saved up, you might be able to use that to cover the difference between the sale price and what you owe on the loan. Just make sure you still have some money left in your your savings account for emergencies.

If you’re looking for possible lenders to cover the gap, here’s a list of some possible avenues to investigate:

• Local Credit Union/Bank: If you’re a member of a credit union or local bank, check with them first to see if they are willing to work with you on an unsecured loan. Many of them offer competitive rates and the fact that you’re an existing customer may increase your chances of getting approved.
• Lending Tree: If you’re looking to connect with several lenders, Lending Tree can be a helpful resource. You submit a single loan request and they provide the information to multiple lenders.
• Lending Club: Peer to peer lending has grown more popular over the last few years and for some people, it’s a great solution to their problems.

Before going down any of these roads, make sure you have all of your financial documents in order and prepare a logical pitch for why your loan should be approved. Build confidence by creating a realistic budget where you can pay back the amount in a timely manner.

Maximizing your selling price

You can’t just put a for sale sign on the car and hope someone gives you the money you need for it. Instead, you’ll need to think of ways to increase your sales price without spending a ton of money.

Prepping your car for sale

If you want to get top dollar for your car, you should take some time to make it look good.

• Vacuum the inside of the car thoroughly. If you have stains that aren’t coming off, consider buying a seat cover.
• Dust the panels and dashboard.
• Empty all junk from the trunk.
• Wash and wax the car to keep it pristine.
• Avoid heavy scents on the inside. Use a light air freshener to appeal to more buyers.
• Clean both sides of the windows. Dirt can accumulate on the inside as well.
• Replace windshield wipers if they are in bad shape.
• Check and replace your car’s fluids.

All of these steps are relatively cheap and in many cases just involves some good elbow grease. By making the car look as fresh and new as you can, you’re giving buyers the impression that you were a careful owner.

Think like a buyer

Just like selling a home, you have to get into the mind of the buyers. If they are buying from a private seller like yourself, they’ll be wondering how well you’ve maintained your vehicle. Gather and organize all the paperwork you have on every car repair and check up done. Be ready to answer questions about how recently certain work was done. A knowledgeable seller makes it easier for a buyer to trust and hopefully buy from.

Thoughts on car loans

One other point I’d like to add for those in a similar predicament is to avoid the temptation of rolling your old car over into a new car from a dealership. I knew someone who did this and it made their finances even tighter. If you absolutely need another car, find a reliable used car as cheap as you can and stick with that until your finances improve.

I hope this guide proves helpful for some people. I’m definitely open to hearing any practical tips or ideas that you might have. Have you ever had an upside down car loan? If so, how did you get out of it?