We all make mistakes, and sometimes small mistakes lead to bigger ones—especially when it comes to debt. It’s easy to get on a high horse and tell someone what they should or shouldn’t have done; coming up with solutions can be a lot harder, and this debt-saddled car owner needs a fix and not more judgment.
(Welcome to a Ask Automatch! Where you get to ask me your burning car buying questions. Got a scenario or a situation and you aren’t sure what to do? Send me an email at email@example.com and I’ll try to help you out.)
This week’s letter comes from Tim, he has gotten himself into a bind with a combination of bad decisions and now needs away out. He had a truck he was using as a work vehicle, but traded it in for another truck, and now he’s locked into a much more expensive and longer car loan with a lot more negative equity.
Up until a few months ago, I had a new 2016 F-350 with snow equipment I used as a second income. The truck was great. My first mistake was selling it because I thought I didn’t want to do snow removal anymore. My second mistake was buying a new Toyota Tundra TRD pro, because I mistakenly believed it would be a bit cheaper and last longer.
I don’t have a problem with the vehicle itself, just the interest rate, term and everything financially related. It’s absolutely destroying my family budget and looking for a way to get out of it and get a smaller vehicle and get back on track financially.
Here’s my problem. I have huge negative equity thanks to interest and how the loan is structured. I’ve read one of Jalopnik articles that suggested getting a lease to absorb the negative equity, find a vehicle that has high incentives to reduce the hit and after 36 months, be able to start fresh.
It’s nearly impossible to find a lease (or dealer) that would even allow me to lease with the negative equity which works out to be about 15-16k dollars and even if the dealer manages to get it through, the monthly payment is just as high as my current truck at $900/mo.
My truck is an 85 month loan, at 8% interest, and yes, it’s a new vehicle with a high interest rate andI had 2-3k in negative equity rolled in from the previous truck.”
Wow, so the key takeaways here are $16,000 in negative equity, 8 percent APR, and an 85-month loan with payments at $900 a month. You’re in quite the pickle, Tim. But fear not—there is a way out of this, but it’s going to take some work and some discipline.
Before I get into what Tim should do, I’d like to take a moment to address a learning opportunity for anyone reading this.
First, if you have a vehicle that is treating you well and bringing in extra income. Do not get rid of that car especially if that car is brand new. That is a surefire way to put yourself in a negative equity situation and your net loss will be even greater because you no longer have the additional income.
Second, don’t be fooled into thinking that you can “afford” a car if the payments are stretched out over an 85-month term. A $900 payment at 8 percent interest means that your total loan cost will be $76,500… that’s a lot of money to spend on a Toyota truck! Always look at the big picture before jumping into something like this.
Tim is correct that I once suggested rolling negative equity into a lease to help break the cycle. However, that really only works when you are a couple of grand under water. Once you surpass $10,000, it’s a pretty different situation.