Avoid repossession, limit finance time
"Our
car's transmission is going out. It has 98,000 miles and we are
upside down in our loan by $7,000. We're not sure how we got there
and we have no idea what to do. The only option we can come up with
is to get a new car and have this one repossessed. What would you
recommend? How badly would that hurt our credit? " ...Claire.
Dear
Claire,
I am
afraid you are about to drive off a bridge. Whatever you do, do
not go out and get another car loan until you understand the basics
of borrowing money to purchase a car. Second, do not have the car
repossessed if you can possibly avoid it.
The "not
sure how we got there" portion of your question is disturbing
and I want to address that first. Several things could have contributed
to your being so far upside down in your loan. They may have been:
- A
loan longer than 36 months. The Federal Reserve Board reports
that the average length of car loans has risen to more than five
years - an all time high. When you borrow for that length of time,
your monthly payments go down. But it also means a large portion
of your monthly payment goes toward interest, with very little toward
the principal, for the first three years. That, combined with the
car's depreciation in the first several years, puts most people
upside down in a long-term loan.
- No
down payment. A car starts depreciating the moment you drive
it off the lot. If you did not place any equity in the car through
a down payment, you start off your loan owing more than the car
is worth.
- A
car with a low resale value. You may have purchased a vehicle
that does not retain its value or is difficult to sell as a used
car.
Now that
you know how you got where you are, let's determine what to do about
it.
Your
idea is to let your current vehicle be repossessed and to purchase
a new car. Bad idea.
The following
are reasons why that would not be the best course of action:
- A
car repossession on your credit history is very damaging and would
make it very difficult for you to get a reasonable interest rate
on a car loan for years to come.
- Repossessing
the car is not the same as repossessing the debt. Your repossessed
car will likely be sold at auction for even less than it is worth,
and you will then owe the difference between what the car sells
for and what is left on your original loan. In your case, that could
be $9,000 or $10,000 - but whatever the figure, it certainly will
be more than you now owe. Then add on the repo fees, interest and
possibly legal fees and more. You end up with a big bill and no
car.
A better
option that you may want to consider is to shop around for the best
deal to have the transmission in your car fixed and hold onto the
car at least long enough for the resale value to more closely match
what you owe on the car.
The good
news is that in general, cars are more reliable now, so time is
on your side. A car with 98,000 miles is not old for most late-model
cars. There still should be many more miles of life left once you
get past this problem. If you do not have an emergency savings account
to tap into for the transmission repair, make sure you put into
place a plan to pay off the expense as quickly as possible. Also,
do not consider this option if paying to have the transmission fixed
is something you cannot afford to do.
Another
option is to sell the car yourself for the best price you can get
and come up with a plan to repay the loan balance. For example,
a home equity line of credit, a loan from a relative or a personal
loan from your bank or credit union. You also may be able to save
money by refinancing your existing car loan.
Keep
in mind that when you purchase a vehicle to replace this one, you
will need to take into account the payment you will be making to
satisfy the loan balance of your other vehicle. That may mean that
you will have to purchase a less-expensive car than you may have
wanted.
When
purchasing a car to replace your existing car, you will want to
choose a car that has a high resale value, is reliable and that
you can afford to finance for four years or less. Consumer Reports
magazine annually lists used cars to avoid and those that are reliable.
If you buy a car that meets these guidelines, you are much less
likely to find yourself upside down in a car loan again.
|
