Sell! Sell! Sell!

September 18, 2008 3:56 PM

Predepression filter: Should I sell my car and pay off other debt?

The Wall St. crisis has gotten me thinking about shoring up my financial situation. I currently own a car with 11k left on the note at 6.3% (29 months left), 1 credit card with 3.1k at 10%, and 1 credit card with 14k at 3% fixed. I don't have much of an emergency fund, just 1 month's rent. I also have student loans, but I'm ignoring them for this analysis. My total debt payment, including rent, is 33% of my monthly gross income. Not good, but I'm not hurting either.

If I dropped the car off at CarMax tomorrow, I'd get about 6k cash in my pocket. It's sort of a desireable model, and I would do better on the private market, but that involves waiting for a buyer. Now, I love my car. A lot. I custom ordered it from the factory, I used freight tracking services to watch it cross the Atlantic (it's a MINI). I've logged every last gallon of gas that's gone into the tank. And I CAN afford it. The problem I have though, is should I afford it?

The interest portion on my huge credit card debt is ~$30/month, so I'm not in that big of a rush to pay it off. If I sold the car, ran a minimal (i.e. rice and beans) budget, I'd be wholly debt free in 8 months. Keep the car, it's 18 months. And I have no cash at the end.

My job is pretty stable, I'm in infrastructure. Roads are one of the few things that are still entirely built in the US, so they're usually a big part of federal stimulus packages. So I'm not entirely worried about needing cash to survive. But who knows, right?

Sorry for rambling, but this uncharted territory we're in sort of makes me crazy. What would you do? Liquidate everything and be debt free, make minimum payments on the status quo and hoard cash, or sell the car and hoard the cash?

posted by anonymous to work & money (24 comments total)

Do you have a way to get to work without the car?
posted by k8t at 3:59 PM on September 18

Pointing out the (maybe) obvious: if you get 6k from the sale of your car you are still on the hook (immediately) for the 5k balance. The lien-holder (bank) will not allow the transfer of the title without getting paid.
posted by trinity8-director at 4:08 PM on September 18

Paid == paid off
posted by trinity8-director at 4:08 PM on September 18

OK, one more clarification. My comments above do not apply to an unsecured loan used to purchase a vehicle. That is, if you got a loan that is not tied directly to the car and there are no lienholders on the vehicle, then you can dispose of it as you wish and keep making the payments.
posted by trinity8-director at 4:11 PM on September 18

there is a lot of information you sadly didn't provide. your income, your location, your age, your family situation. that limits a lot of the advise people here will be able to give you. your car will be a lot more important if you live in LA than in NYC.

here's what I do feel comfortable stating: the first thing you should pay off is the 10% interest credit card. it's not a bad rate, so keeping the card around may not be a bad idea (credit is tough to get right now), but don't use it a lot as you have cheaper options. I wished I knew the limits on your cards. it is important for your credit history that you keep the actual load on each card at or below 49%. if your 14k card had a >28k limit you'll be fine, if it's less than that it may very well be depressing your score, which in turn causes you to pay more interest for other offers you end up taking. having an on-time payment history and consistent usage as described is far more important than anything else.

I would recommend trying to get your emergency fund up to three months rent and living and eventually six. do remember you have to cover many insurance costs out of pocket first and that they often top out (dental being an example). rent may be something you could push down a bit, as may be the car but only you really know enough about your situation to know what to do.

I'd say you're in a decent spot right now.
posted by krautland at 4:14 PM on September 18 [1 favorite]

If you fear a disaster, being debt-free is the last thing you should be focused on. For worse-case planning cash is king. (For worst-case planning you want to have gold, weapons, and friends in foreign consulates, but that's another thread.)

You can always default on debt if you must, and you cannot buy food with lack-of-debt (credit availability on credit cards would vanish for non-high-earners in a true meltdown). Also, unlike the Great Depression of the 1930s, any big economic disaster in coming years would likely be accompanied by / caused by rampaging inflation -- which makes your debt cheaper.

Now I'm not your financial adviser, of course, but I'd have to think that before you even think of paying down debt you should have a much larger emergency fund. The most ardently anti-debt financial advisers (I'm looking at you, Dave Ramsey) would even agree with this. If you fear hyperinflation maybe some of that should be in securities or commodities -- things that will appreciate when the currency devalues.

And in terms of your car, in addition to be maybe being impossible to sell because you're upside down, that's also bad disaster planning. Mass transit gets cut in hard times, and eliminated in terrible times. The job you might need might be farther away and you'll need a reliable car to get there. A bout of hyperinflation could make it impossible for you to replace a car with your devalued funds.
posted by MattD at 4:34 PM on September 18 [4 favorites]

I am in no way a financial expert, but this seems like a really bad idea to me.

You're upside-down on the car. If you sell it, you'll have no car and $5K left in debt on it; you wouldn't be able to hoard any cash from the sale because the sale wouldn't generate more than you owe on the loan. You have to pay off the note to sell the car, so you'd need $5K cash saved up to even sell the thing. Do you have $5K?

If you end up needing another car after you've sold yours, you'll end up with more debt on top of that $5K, and an unknown factor in whatever car you end up buying. You may end up with $11K in debt on a car that isn't as nice as the one you have. If you want something even close to being in the same class as your Mini, you'll end up further in the hole than you started.

I guess I'd rather have $11K in debt with a car than $5K in debt with no car.

If you are intent on selling it, I would wait until you have enough equity in the car to pay off the note with the proceeds from the sale.
posted by MegoSteve at 4:40 PM on September 18

3% fixed rate on your card, holy crap, where do I sign up for that deal?

Seriously though, balance transfer as much as you can-- including the balance of the car-- onto your 3% card. Then take your monthly income, subtract your monthly expenses, and divide the remainder in two. One half goes into a brokerage account, one half goes towards paying off your credit card balance.

The brokerage account should give you better than a 3% return even if you're in the most conservative bond fund in the world, so it's more profitable to you to invest the money rather than fully committing to paying off the principal of your debt. I'm a bit financially conservative, though, which is why I go for the half-invest half-paydown strategy.

Keep your car; unless you're living in Manhattan it's probably best to have it around.
posted by mark242 at 4:45 PM on September 18

Eh, screw anonymity. Talking hard figures is only impolite in the US, right? Well, let's do it anyway. If my car gets stolen from my profile, then I don't have a question anymore. (That's a joke.)

I'm 28, single, 75k, Los Angeles. The "6k in my pocket" comment actually meant that the car is worth 6k more than I owe. Which I'm really happy with. I've never been right-side-up on a car loan before.

I ride my bicycle to work everyday and around the neighborhood for shopping, etc. The car is more or less for road trips and Saturday morning canyon runs. Which I love. But, if I sold the car, I'd buy a $1500 beater Miata.

For the 14k card, I'm quite a bit over the magic 50% balance-to-limit. But, for my entire credit balance-to-limit, I'm well under 50% total utilization. I had that whole balance on a much higher limit card, but the 3% fixed rate offer made me jump over. I know it's not that good overall, but I haven't seen a hit on my score yet and it's been a couple of months.
posted by hwyengr at 4:58 PM on September 18

mark242: The brokerage account should give you better than a 3% return even if you're in the most conservative bond fund in the world, so it's more profitable to you to invest the money rather than fully committing to paying off the principal of your debt.

Not really. You have to compute returns after taxes since the credit card debt is not tax deductible. You would need to earn better than 4.5% before state and federal taxes to equal even your low interest credit card. No conservative short or intermediate term bond fund is paying that much today.

You seem to be in fine financial shape except that you need a larger emergency fund. So no need to panic and sell the car. First work on paying off the 10% credit card and upping your emergency fund (half and half). Next work on paying off your car loan early. Put no new debt on your two credit cards or get a new card for current expenses and absolutely pay it off each month. Put your two cards in a drawer until paid off.
posted by JackFlash at 5:48 PM on September 18

Aside: Any of that 10% credit card debt you pay off is the equivalent to putting the same money into an investment and getting a guaranteed 10% rate of return. $30/mo = $360/year, a nice return on investment.

If you can get a bit ahead of your expenses, let's say by keeping the car but saving elsewhere (not eating out, buying cheaper food in bulk), you could pay this down and have a bit more breathing room.

As others have pointed out, though, you want to have a decent cash reserve so you can weather unexpected expenses without having to sell off something under duress.

How much cash, and when you pay off your debt, is a personal call, but I'd recommend first building up a 2 - 3 month cushion in savings, and then paying down the debt.
posted by zippy at 6:21 PM on September 18

Any of that 10% credit card debt you pay off is the equivalent to putting the same money into an investment and getting a guaranteed 10% rate of return. $30/mo = $360/year, a nice return on investment.

It's even better than that. Because of state and federal taxes, you would have to earn about 13.5% on an investment to equal the 10% you are paying on the credit card. Paying your credit card off is better than a 13.5% investment.
posted by JackFlash at 6:50 PM on September 18

Personally:

A - Your best bet is to kill the highest-interest loan first; that's not your car nor your fixed-apr card.

B - On the face of it, the next target should be your car -- from a saving money perspective as well as a debt reduction perspective. However: you might need a car for transportation, and (hokey as it sounds) if you lose your job and don't have any money left, you can always live in your car and make payments on it via your credit card until you get another job.

Plus, with the car, you'd take a 5k hit right off the bat, meaning that (insurance and such aside) there's no short-term financial benefit to you for selling the car with a 5k loss now, when compared to holding the car until you've made 5k worth of payments.

So if I were you, I'd keep the car, go rice-and-beans and reduce my driving to save on gas, and kill the high-interest card first followed by the low-interest card.
posted by davejay at 7:15 PM on September 18

Oh, I misread your question -- I thought you were 5k under on the car loan.

Honestly, I'd still sit on the car, inasmuch as it'll be paid off soon, and living in Los Angeles means a car-free existence isn't easy (I live in LA as well) -- having a paid-off car puts you ahead, then.
posted by davejay at 7:17 PM on September 18

You live in LA and want to sell the car? Are you nuts? Don't panic. Pay off your loans after saving cash. Don't buy a beater when you already have a car you bought new and know what is up with it. Be patient. The sky is not falling. It just seems like it is. Best of luck. Remember to breath.
posted by snowjoe at 10:14 PM on September 18

Cash? You want to trade your car for cash?

Have you heard of inflation? Trade your car for something, but don't make it cash. Did you know the world's central banks have injected US$900 billion into the money supply in the last week? That makes the cash that's already out there worth less.

Heck, a couple months at that rate and you'll be able to pay off your car and credit cards with a week's wage.
posted by ikkyu2 at 12:05 AM on September 19

I'm going to go against the grain here. I would sell the car, buy a RELIABLE, fuel efficient later model car, and pay off debt. Take advantage of the fact that your car is currently worth more than you paid for it and trade it for another car that somebody else has already swallowed the depreciation on. Wholly debt free in 8 months? Do it. Then you can sock away some capital to take advantage of real estate bargains that are out there due to our current market mess. Frankly, I'm jealous of your situation--but have a similar plan ready for when I finish grad school next year to eliminate my debt quickly and start saving for retirement.

Here's what I recently realized about driving nice cars: who cares? Reliable, older cars are where its at. I have a late 90s Civic that is paid off, still looks OK and is (knock on wood) reliable as all get out. I plan to drive it until it dies--it has 140k miles and I think I can easily get another 100k and hopefully more. Driving fancy cars is all about impressing random strangers that pass you on the road. Who cares? The peace of mind that accompanies being debt free is worth more than having a fancy car, IMO. Once the debt is gone, and your savings and retirement accounts are flush, you can buy the fancy car if you still want one.

I know the guy that runs the Get Rich Slowly blog is a Metafilter fan and frequent contributor--hopefully he will chime in if he hasn't already (shoot, he may even try to buy your MINI from you!). Good luck.
posted by jtfowl0 at 5:59 AM on September 19

The mini gets 30+ mpg. It would be a waste of money to sell it and buy another high-mileage car. He already has a high-mileage car.

Personally, I like to get rid of CC debt first. Its the worst kind of debt to have. Do that first then worry about simplifying your life with less things.
posted by damn dirty ape at 6:50 AM on September 19

And yes I understand you have low interest, but the idea here is to start living as someone who doesnt think of the credit card as something you can just casually carry 17k debt on. You should pay them off completely monthly. If youre not, then youre living WAY beyond your means and the car isnt the problem: its you and your spending habits.

I think its a common reaction to go "OMG I HAVE TOO MUCH STUFF" when you start to realize how much debt you are in. Instead of having a firesale every few years, try to train yourself not to live a debt ridden lifestyle.

Keep the car. Having working reliable transportation and collateral is worth more than its cash equivalent.
posted by damn dirty ape at 6:57 AM on September 19

I second damn dirty ape, and offer a hearty WTF? to the people who think you're in good financial shape.

If you're single and making $75K a year, unless there's some big part of the backstory that we don't know (a kid, supporting your parents, medical bills, something) there is NO reason whatsoever why you should be carrying consumer debt. At all, and certainly not $17K. Frankly, that's just irresponsible.

My vote is: shore up your emergency fund a few thousand bucks, then kill off your consumer debt as fast as possible. I'm of a similar mind to jtfowl0, that fancy cars are for suckers, but whatever, if it makes you happy, keep it. You make enough money that it should take you only a few dedicated months to pay it off anyhow. Then live well within your means and save the cash that you had been putting toward paying down debt. Save, save, save. When you have a big cushion of savings the prospect of all this financial instability becomes much less scary.
posted by Sublimity at 6:21 PM on September 19

But, for my entire credit balance-to-limit, I'm well under 50% total utilization.
that's irrelevant. the scoring system looks at each individual card. you go over on one and you're considered riskier.

I'd recommend trying to put $500 each month into a savings account for a year or two. leave it there and don't touch it. treat it as your safety net. as in I really have no other choice but to use this net. if that means selling the mini, sell the mini. if you can swing it without having to, don't. it's okay to have a little fun.
posted by krautland at 11:28 PM on September 19

Yeah, but we're not talking "general personal finance" here, we're talking disaster planning.

So here's an idea -- take some of the surplus and buy a nice big supply of canned and dried food. I know this sounds terribly retro, except that the WSJ recommended it back in April, since prices of food are going up at a rate higher than any you're likely to earn in a safe investment. So, pay off the 10% card, then pre-buy a bunch of food.
posted by salvia at 12:29 PM on September 20

(The "yeah, but" was not directed at you, krautland.)
posted by salvia at 12:31 PM on September 20

Yeah, but if you have undisciplined personal finance habits when times are OK, you're really up the creek when times are hard.
posted by Sublimity at 8:42 PM on September 20