Upside-down car loan.

July 10, 2008 11:50 AM

Outrageously upside-down with a car loan. Help!

The current pay-off amount for our car loan is right around $20K. We went to CarMax last night to see if we could get into a cheaper, more efficient car, however they appraised the car we have at about $8K, and as far as I know, no one would roll-over such a huge deficit. We like the car we have (aside from it's somewhat average fuel efficiency), but the monthly payments are a real killer: $550, and we're also about 2 months behind thanks to a severe income drop last year. My wife wants to do a voluntary repo, but I think that is a terrible idea, and leaves us with very few transportation options. No bank that I know will give us a re-fi, due to less then stellar credit and a general tightening of belts by lenders. Any advice?

posted by Brocktoon to work & money (26 comments total)

This is how cars work. They go upside-down pretty much the instant you drive off the lot, and stay there for, generally, at least half the life of the loan. Assuming a voluntary repo works - eg, that you actually do end up with no car and no loan - you hopefully can find a "new" used car that you can actually afford.
posted by Tomorrowful at 11:56 AM on July 10, 2008

Voluntary repo? Not good. How will you qualify for financing on a new car with such a thing being done?

What kind of car is this that is worth $8k and you have a $20k outstanding balance? Was it damaged? Can insurance help?
posted by caddis at 12:00 PM on July 10, 2008

What make/model/year of car is it, and what is its condition? It's possible that CarMax's appraisal is not 100% accurate, could be low by $3,000....

However, if it's any sort of SUV you'll have a very difficult time finding a buyer for it in today's marketplace.
posted by thewalrus at 12:01 PM on July 10, 2008

How can you possibly owe 20K on a car that is worth 8K? This is hard to do. Were you taking on old debt when you bought your current car, or is the dealership trying to screw you? Go to Edmunds.com and find the value for your vehicle. They'll give you three prices: Trade-in, personal retail, and buying from a used car dealership. See what you car is really worth.

My guess is that you have about four years of payments left. If you buy a used car for say 5K or 6K used you could finance it for five years and lower your payment. Or ride it out with your current car. Regardless of gas mileage it's hard to make any transaction worth the gas differential.
posted by LoriFLA at 12:03 PM on July 10, 2008

as far as I know, no one would roll-over such a huge deficit.

Actually my fiance did something similar a couple of months ago, though his payoff was closer to $15k (the trade-in value was ~$7k). He got a used car at a dealership. The monthly payment was higher but maintenance was included up to 100k miles, so it probably balances out given the poor condition of his former vehicle. He probably couldn't give away his pickup truck now though, so maybe we were lucky.
posted by desjardins at 12:07 PM on July 10, 2008

How can you possibly owe 20K on a car that is worth 8K?

It's easy if you have a really shitty interest rate and high mileage.
posted by desjardins at 12:08 PM on July 10, 2008

Also if it's an American P.O.S. with horrid resale value. My fiance's former truck was a Chevy. 'Nuff said.
posted by desjardins at 12:09 PM on July 10, 2008

Sell it privately for whatever you can get, use that to pay down the loan and just get a cheap beater. Fuel efficiency really doesn't figure into things at this point.
posted by zeoslap at 12:12 PM on July 10, 2008

How can you possibly owe 20K on a car that is worth 8K?

It's not even remotely hard to do if you're not exactly creditworthy.
posted by thisjax at 12:25 PM on July 10, 2008

Sell it privately for whatever you can get, use that to pay down the loan and just get a cheap beater.

That is not possible unless the OP has cash to pay off the loan. You can't sell it with a lien on it and you can't pay off the loan to remove the lien if you are upside down and lacking the extra cash.
posted by caddis at 12:29 PM on July 10, 2008

You're stuck with it for the next few years.

DO NOT let it get repo-ed. If you do, you can kiss the idea of getting another car goodbye. At least, not without crippling interest rates.

Hey, you said you liked it, right?
posted by unixrat at 12:38 PM on July 10, 2008

A voluntary repo is not going to do you any good. If you just hand it back to the bank, they turn around and sell the car at auction, where it will go for far less than the value. Then the bank will come back after you for the difference between what it sold for and the loan balance. So instead of having a working vehicle plus a $20k loan, you'll have destroyed credit, no vehicle, and a bank still coming after you for $17k.
posted by Lokheed at 12:58 PM on July 10, 2008

If you have decent credit look for an unsecured line of credit or the like to pay out the car loan, and then you can look at selling it.
posted by WinnipegDragon at 1:01 PM on July 10, 2008

I've never done this and don't even know if it's possible, but you might consider checking to see if you can refinance your car loan. You might be able add more years to lower the payment or possibly get a lower rate on the money. More years means you'll pay more interest in the long run, but that may be your only choice if you can't make payments. You should really talk to your lender or your local bank about your options.
posted by cnc at 1:13 PM on July 10, 2008 [1 favorite has favorites]

This comes up a lot on financial advice shows and advice columns (I've heard it often on Dave Ramsey, for example), and the advice is pretty much invariably to suck it up and pay it off.

Giving the car back to the loan company won't make the loan go away, as Lokheed explained. If the interest rate is super high, you may be able to refinance (talk with credit unions for this -- they are often in a good position to help) which will save you some money each month but you will still need to pay off the principal.

I was talking with a car salesperson recently, and she was saying that she has been seeing this a lot lately -- people so far upside down that even with creative valuing of the trade-in and inflating the new(er) car price, the financing can't be made to work. The values of some larger SUVs in particular are dropping really fast, leaving people really far underwater with their loans. Unfortunately there often isn't an easy way out, at least not until someone slogs through a few years of the loan and gets closer to the value of the car.
posted by Forktine at 1:14 PM on July 10, 2008

Join a credit union and see if they'll refi the loan to a more manageable rate. Pay it off as aggressively as possible. It's a crappy deal, which you already knew. Most, if not all auto dealers will make it worse.
posted by theora55 at 1:35 PM on July 10, 2008

See if you can negotiate with your loan company for a lower interest rate or lower payment (depending on your current loan term, they might be able to stretch it out a little longer, making the payment lower. Essentially, refinancing.) Don't do a voluntary repo - like others have said, the loan will not go away and you will have no car and a loan company chasing after you for the rest of the money.

In my experience, CarMax majorly lowballs the trade-in value that they will give you for a vehicle. I did end up trading in my car with them, but only because they had a car I wanted with an option package that they clearly didn't understand, so while they lowballed me by about $6k on my trade-in (according to Kelley Blue Book and Edmunds), the price of the newer car was about $8k less than it should have been. I was really lucky in that regard. Otherwise, I wouldn't have traded my car in there, due to the severe undervaluing of my trade-in.

If you really want to trade the car in, try taking it to a dealership that deals with only that make and see what they will give you. Go on Edmunds and KBB and check the trade-in and private sale values for your car beforehand, making sure to include any options you have on the vehicle. Be prepared to negotiate, and don't take a crappy deal.

Best case, you can trade in the vehicle. Worst case, you have to suck it up and pay the loan off.
posted by bedhead at 1:57 PM on July 10, 2008

Thanks guys! It's a 2003 Toyota Highlander with 63K miles on it, 4 cyl, 2WD (a Camrylander, as I like to call it). It has brand new tires, and only minor cosmetic damage to the bumper. Toyota sold it to us used for $26K.
posted by Brocktoon at 2:35 PM on July 10, 2008

Looking at the local market here in Seattle, I would think that car would be worth at least $11K at retail, maybe $14K if it's in really nice shape. That said, you're still a ways from being even.

Two options (mentioned above) are a personal loan for the balance + sell and get something much cheaper (like a 199x car), or sucking it up.

Another option might be to sell both of your current cars, assuming the total sales price of the two cars will cover all of the loans, and then buy two cheap cars to replace them with, or one car to share between the two of you.

Another would be to sell the other car, use the proceeds against this loan, and buy a cheap car to replace that one, and keep the Highlander until your new lower loan balance dips below the value of the car.
posted by maxwelton at 3:31 PM on July 10, 2008

The car is worth much more than $8K. The reason why they lowballed you is partly because you're desperate, partly because SUVs have become the pariah of the auto industry, and because there are much fewer buyers in the market now than there was year ago.

I'd wager that the car will actually go up in value IF the price of gasoline comes back down to $3 AND banks sort out their shit in the next few quarters. What are the odds of that? 30-40%, because while gas will likely come down, banks (and lending standards) will remain tight for the foreseeable future.

So where does that leave you? As others have said: suck it up. Financially, it is in your long-term best interest to keep a dependable car and pay off the loan, than to try to save money on gas, get repoed, and end up still needing to buy another car. $550 a month is steep. But cable is a luxury. So is a cell phone. So are your trips out to eat. So is buying beer at a bar. So is a pack of smokes. Figure out your shit. Do it because you want to keep your car. Do it because you're living beyond your means and it's time to suck it up and only buy things you can actually afford. Do it because your wife is counting on you. Do it because you deserve better than to come to an internet message board and ask for advice for a perfectly avoidable mess.

P.S. If I sound harsh, it's because I am. But I still love you. (in the general, I love everyone sense) :-)
posted by SeizeTheDay at 5:34 PM on July 10, 2008 [1 favorite has favorites]

Gas prices always come back down when summer's over, and people are ridiculously short-sighted when it comes to gas prices and auto purchases. As a car salesman told me, one week gas prices go up, everyone wants a hybrid. The next week gas prices come down, and everyone wants a pickup truck. Demand for your SUV will come back up. Carmax won't offer you $20,000, but in September you can get more than $8,000, easy.
posted by Dec One at 7:44 PM on July 10, 2008

Depending on what your credit has done since you bought the car, you *could* consider refinancing the loan at another (or the same, I guess) lender to save some moneys.
posted by TomMelee at 5:29 AM on July 11, 2008

Similarly harsh, you may have overpaid on the purchase- the MSRP for a brand new Highlander is under $28k.

Carmax generally offers low prices on their tradeins- they are closer to the auction price than the trade-in price and nowhere near the retail/private party price.

It is still a bad time to sell a larger car- low demand means low prices.

I sort of doubt there is a way to unload that car and reduce your monthly costs. Unless you do a tremendous amount of driving, the gas savings will not outweigh the hit you'll take. Does a 4 cylinder Highlander really get that poor MPG? You presumably bought a large vehicle for a reason, will your needs even be fulfilled by a smaller car?
posted by gjc at 7:42 AM on July 11, 2008

SeizeTheDay: Despite your disclaimer and emoticon, I get the feeling you are parroting the other comments here in an attempt to justify your self-righteous rant. You would, however, probably get marked "best answer" if my request had been: "Please pass judgment!"

Thanks to everyone else.

gjc: I won't have practical use for a smaller car for several years (10+ maybe).

My theory behind the less than stellar MPG is due to it's bulk and weight; I don't think the Camry chassis and powertrain were optimized to carry the extra bulk and weight of an SUV.

The $26K includes interest.
posted by Brocktoon at 9:09 AM on July 11, 2008

I see you're in California. I would wait until the fall/winter and try to trade it in a state with snow + lower gas prices (which is anywhere other than California). People are more inclined to want a SUV when they have to drive in the white stuff. I don't know if you can make some kind of trade with another state through a local dealer, but I'd imagine the demand would be higher in, say, Montana in January.
posted by desjardins at 12:02 PM on July 11, 2008

I'd imagine the demand would be higher in, say, Montana in January.

Not for a SUV without 4wd.
posted by Forktine at 12:17 PM on July 11, 2008