dcsimg The Get Rich Slowly Forums • View topic - Getting out of debt when you're 'upside down.'

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PostPosted: Thu Apr 26, 2007 9:45 pm 

Joined: Wed Apr 04, 2007 9:19 pm
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Location: Portland, OR
consultantjournal wrote:
He said that, if he sold the cars, he'd be short $7500 on each. That's $15,000 of debt with no assets and he'd still need to buy one or two cars to replace his transportation.


While that's unfortunate, it's also irrelevant. Selling the cars and replacing them with lower-value cars that will depreciate less quickly is the quickest way out of the hole.

Right now he may be $15K upside down, but the cars are likely depreciating more quickly than he is paying off principal, particularly because of the high interest rate and long loan terms. Thus every month he owns those cars, he is getting more and more "upside-down".


Sam

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PostPosted: Thu Apr 26, 2007 10:13 pm 

Joined: Wed Apr 04, 2007 9:50 pm
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Location: Vancouver, Canada
samerwriter wrote:
consultantjournal wrote:
He said that, if he sold the cars, he'd be short $7500 on each. That's $15,000 of debt with no assets and he'd still need to buy one or two cars to replace his transportation.


While that's unfortunate, it's also irrelevant. Selling the cars and replacing them with lower-value cars that will depreciate less quickly is the quickest way out of the hole.

Right now he may be $15K upside down, but the cars are likely depreciating more quickly than he is paying off principal, particularly because of the high interest rate and long loan terms. Thus every month he owns those cars, he is getting more and more "upside-down".


Perhaps I'm missing something here. Two used 2000 Honda Civics would cost a total of $16k plus tax, which I assume he'll need to finance, since he doesn't have the savings. I assume the rates would be high, since he had such high rates for the original cars. And then he'd still have $15k in debt (if not more for paying off the loan early), for a total of $31k in debt. How is this better? After five years, those cars will be worth about $11k together.

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PostPosted: Fri Apr 27, 2007 7:38 am 
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This is why I think it's best not to jump to any rash decisions. The cars are worth in theory what the blue book value is and some theoretical used car(s) can be purchased for whatever someone says. The reality may not be so pretty. Better to sit tight for the moment and remain flexible than choose a path that may limit future options for the worse.

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PostPosted: Fri Apr 27, 2007 9:04 am 

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Location: Portland, OR
consultantjournal wrote:
samerwriter wrote:
consultantjournal wrote:
He said that, if he sold the cars, he'd be short $7500 on each. That's $15,000 of debt with no assets and he'd still need to buy one or two cars to replace his transportation.


While that's unfortunate, it's also irrelevant. Selling the cars and replacing them with lower-value cars that will depreciate less quickly is the quickest way out of the hole.

Right now he may be $15K upside down, but the cars are likely depreciating more quickly than he is paying off principal, particularly because of the high interest rate and long loan terms. Thus every month he owns those cars, he is getting more and more "upside-down".


Perhaps I'm missing something here. Two used 2000 Honda Civics would cost a total of $16k plus tax, which I assume he'll need to finance, since he doesn't have the savings. I assume the rates would be high, since he had such high rates for the original cars. And then he'd still have $15k in debt (if not more for paying off the loan early), for a total of $31k in debt. How is this better? After five years, those cars will be worth about $11k together.


Right now he's "upside down" by $15K on a new Honda Pilot and a used Honda Accord. I'll go out on a limb and say that those cars are, combined, worth $30K. If he is upside down by $15K, then he currently owes $45K. He has $45K in debt and $30K in assets. Moreover, those assets (especially the new Pilot) are depreciating rapidly.

Now let's say he sells both cars for $30K and puts the proceeds towards his existing loans. Now he's $15K in debt with no cars. Then he buys two Honda Civics for $16K. Now he's $31K in debt with $16K in assets. It may seem like his situation has not changed. But the key here is that the older Civics will depreciate less rapidly than the new Pilot.

Let's look at both of these scenarios one year down the line. It's entirely realistic that the Pilot and Accord combined will lose around $5000 of value (mostly from the Pilot). Meanwhile the two Civics will likely not lose more than $2000 worth of value. Now, with the Civics, he's $3000 ahead of where he would be with the Accord and Pilot.

Now as tinyhands points out, this is correct in theory. But there are a couple potential monkeywrenches:

1) (I mean no offense to the original poster, I'm painting with a broad brush here). Buying and selling cars can be fraught with peril. Moreso for used cars. I've seen a couple posts on Personal Finance blogs recently where smart people with good common sense have bought more car than they planned. In fact, it sounds like that may be what already happened in this situation. For someone who repeatedly finds himself on the short end of a car buying/selling transaction, trying to "trade down" may be a good way to wind up with less car for the same money.

2) The OP doesn't actually own these cars, the bank does. So to sell them he needs to pay off the note. That requires some measure of liquidity, which he may not have.



If it were I in this situation, I'd stick a forsale sign in the window of the Pilot, and advertise it in the paper, at a fair price. If someone bit, then I'd do whatever necessary to pay off the loan so I could sell the Pilot. Then I'd live as a one-car family for a while. If that absolutely didn't work, then I'd look for a good deal on a late 90s Civic.


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PostPosted: Fri Apr 27, 2007 9:35 pm 

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samerwriter wrote:
Right now he's "upside down" by $15K on a new Honda Pilot and a used Honda Accord. I'll go out on a limb and say that those cars are, combined, worth $30K. If he is upside down by $15K, then he currently owes $45K. He has $45K in debt and $30K in assets. Moreover, those assets (especially the new Pilot) are depreciating rapidly.

Now let's say he sells both cars for $30K and puts the proceeds towards his existing loans. Now he's $15K in debt with no cars. Then he buys two Honda Civics for $16K. Now he's $31K in debt with $16K in assets. It may seem like his situation has not changed. But the key here is that the older Civics will depreciate less rapidly than the new Pilot.

Let's look at both of these scenarios one year down the line. It's entirely realistic that the Pilot and Accord combined will lose around $5000 of value (mostly from the Pilot). Meanwhile the two Civics will likely not lose more than $2000 worth of value. Now, with the Civics, he's $3000 ahead of where he would be with the Accord and Pilot.


Mmm...but at the end of five years, he has two 13-year-old Civics vs two five-year-old cars. With luck, he could drive the Civics another 5-7 years and then pay (not inflation adjusted) another $16k for two cars. In comparison, he could drive the Pilot and Accord another 15 years beyond the original 5. Keeping the cars he has now for 20 years would be the best scenario, given that he's already paid for them.

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PostPosted: Tue May 01, 2007 12:03 pm 

Joined: Mon Apr 23, 2007 7:03 am
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Location: Tampa, FL, USA
My wife is the definition of Dave Ramsey's "Gazelle Intense!"

She drives the nicer, newer car. According to KBB, we're about 7500 upside down on trade in on her car, and $5000 upside down on private party value if we can sell it outright. Considering it's low miles and it has a 7 year transferable bumper to bumper warranty, we could get the full private party value.

She wants to consider selling her car, and putting the $5000 upside down value on an unsecured loan. Then buying something (financed) for about $7-8K. That would eliminate $20,000 in debt, and allow us to finish our debt elimination in 2 years - 4 months, instead of the originally planned 4 yrs - 6 months.

I have to admit, it's an attractive idea. At that point, my Accord would be the bigger car and she'd take that over. I could get a 2001 Toyota Corolla for under $7000 every day around here.

Obviously, the benefit here is that the faster we're out of debt, and have a fully funded emergency fund, the less likely we are to get hit by an emergency that would put us back into debt.

After everything is paid off, we'd have to start a plan to replace the cars, but it would be for cash.


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PostPosted: Wed May 02, 2007 7:53 am 
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Croz wrote:
...putting the $5000 upside down value on an unsecured loan. Then buying something (financed) for about $7-8K.

Given your history, can you really do this? I mean, it's one thing on paper, and still another to find a lender. But, and I mean no offense, given the black cloud that follows you around, I fear you're setting the stage for another series of unfortunate events. Essentially, my thinking is, don't rock the boat.

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PostPosted: Wed May 02, 2007 8:54 am 

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tinyhands, I take no offense. In fact, I laughed out loud when I saw your response. Believe it or not, the unsecured loan is already available to us if we choose to use it. I realize that based on my past history, the idea of doing this is questionable! Don't think that didn't cross my mind! :D

Just an idea. Not something I'm going to do yet. But it would knock 2 years off our debt elimination plan because of the huge drop in monthly payments.

My wife is also attuned to the idea of getting some humility. Being broke, driving a $35,000 car gives her a decent amount of cognitive dissonance. I was just surprised that it was her idea!

And tinyhands, I appreciate the honesty. Call me out whenever you see fit!


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PostPosted: Wed May 02, 2007 9:02 am 
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You may want to look first at refinancing your wife’s car to unsecured debt before selling it. Then, after it is sold, use some of the proceeds to by an under $7,000 Corolla and use the rest to pay down the refinanced debt. You will still end up with about $12,000 ($5,000 + $7,000) in debt related to the transaction, but you will only need to find one loan rather than two.

When you have poor credit, a second lender looking at a new $7,000 may get nervous when they see you just got a loan for $5,000. Whereas a personal loan used to pay-off another loan (will likely be a condition of the loan) may be easier for a lender to swallow. The lender may even insist on sending the check directly to the current finance company.


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PostPosted: Mon May 07, 2007 9:26 pm 

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These cars continue to be the bane of my existence.

About a month ago, I was in an accident in the Accord. It was on the verge of getting totaled. I was actually hoping it would be totaled, because then my GAP would pay the $1000 deductible, and I could get out from under an upside down car and buy something cheap.

But it was just on the verge, and the insurance company decided to fix it. It's been a month of driving a rental car, and paying my share of the rental cost, about $5 per day, for $150 so far. Body shop called me today and told me it was fixed.

Went to pick it up and pay my deductible, when they gave me the bad news. The car was done and they did an alignment on it. When they took it for a test drive, they discovered that the impact did something to the transmission. It won't shift out of first.

Needs a new transmission. Had we known that the transmission was shot, the insurance company would have certainly totaled it. But there was no way to know it because it wasn't obviously externally damaged, and it wasn't drivable for a test drive. Now that they've spent $6000 getting everything else fixed, they're not going to total it over an additional $2500.

Oh well. Can't win them all, I guess.


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PostPosted: Mon May 07, 2007 10:08 pm 

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Oh, that's terrible. An accident like this can take up to 50% off the resale value of the car. We had an accident last year and my lawyer said that, since we weren't at fault, we can insure the other party's insurance for the loss when we sell the car. Just FYI. Also, if you were looking at selling the Accord, you should consider that an accident that goes on your title will devalue the car. (I don't know if it's really 50%.)

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