Negative Equity Auto vs CC Debt

[PoorLifeDecisions]

Hey all,

I've made some terrible financial choices throughout my 20's and have only recently changed my ways from the "head in the sand" accounting method. I've analyzed and corrected my behaviours to avoid the same issues going forward, but I have one last problem to solve.

Here is my current situation:
I recently bought a brand new car that was way out of my means, gets horrible gas mileage, and costs a ton to insure.

Current Loan Balance: 36,000 @ 3.5%
Monthly payment: 635
Monthly Gas: 250
Monthly Insurance: 110
Car's current KBB trade in value: 31k-32k

The mileage on the car is currenlty 4500. It is a vehicle that holds its value extremely well, and the current KBB for the same vehicle, 2 years older, with 25,000 miles is 28K. I have just eaten most of the depreciation of the vehicle.


This alone is not an issue with my income. However, I have amassed a great amount (40k...Yes, I know, I'm an idiot) of high interest credit card debt. I have transferred what I can to 0% balance cards, but still have a sizeable amount to pay down at 15%+. Once I pay down the balance of a card, I usually receive 0% APR balance transfer offers, so I will continue to juggle those.


I've trimmed all fat out of my budget and every spare cent is going towards these debts. However, my current auto situation needs to change. I have looked through the local market for 4-6k cars and have not found anything that would be reliable enough to meet our needs. Plus that 4-6k cash expenditure could be put towards 15% debt.


I am looking to purchase a 2014-2015 base model Mazda 3 with 20-40k miles. These can be had locally for 10-13k. I have calculated my mileage savings and insurance savings and would save $170 a month alone in gas and insurance. My state does not tax the amount covered by a trade in so I would pay no tax on the transaction.


My question is whether I should continue paying my current car loan down until I break even (Or build equity) to trade in, or if I should roll the 4,000 negative equity into the used Mazda purchase. The downsides I see to keeping my current loan is that I lose $170 each month to insurance and gas.

The end result would be:
Loan Amt: 14,000-18,000 @ 4-5%
Gas: 110
Insurance: 75

I can afford all CC payments + a little extra each month regardless of what choice I make. I am unsure of which road to take to pay off the total debt sooner. My goal is to be debt free with a reliable car at the end of the day. By purchasing the Mazda I will be saving $500+ dollars a month that could be used towards my higher interest debt, but would be underwater for quite some time on the vehicle.

Also to note, my current vehicle is still under warranty for the next 5 years, 60,000 miles and has all maintenance included for the first 2 years. Despite it's bad fuel economy it will hold its value extremely well throughout it's life.

[Petunia 100]

Personally, I would definitely get out from under that expensive vehicle immediately. Then I'd think hard about whether or not I really needed to spend 10k on my next vehicle.

[greenskeeper]

Pay down the new car until you can get out of it.

In the meantime you need to build up at least $1000 emergency fund.

You also need to set aside money to pay CASH for your next vehicle when you get rid of the new car. Even if it's a $2-4k vehicle it will get you where you need to go.

[sblatner]

We have a 2010 Mazda 3 hatchback and love it. Have never had to put any money into it except for regular maintenance.

[dczech09]

My question is whether I should continue paying my current car loan down until I break even (Or build equity) to trade in, or if I should roll the 4,000 negative equity into the used Mazda purchase. The downsides I see to keeping my current loan is that I lose $170 each month to insurance and gas.

The end result would be:
Loan Amt: 14,000-18,000 @ 4-5%
Gas: 110
Insurance: 75

Based on a 5 year loan, 4.5%, and $18,000, your monthly payment would be about $335.

Basically, you would free up AT LEAST $475 per month with this deal. That is pretty decent, however you have over $40,000 in CC debt. Yes, a lot of that is at 0%, however that does not matter because all 0% deals have an expiration, after which they revert to an abnormally high APR.

If I were you, I would seriously consider finding a cheaper option that you could potentially pay cash for. Even if that means saving up for a few months while making minimum payments. I just recently bought a $7,800 car for "cash" (no lease or payments, I wrote a check). It is a reliable car and it gets me from point A to point B. Check out Craiglist and keep looking. There are deals out there!

I would also build a small emergency fund if you have not already done so. About $1,000 to $3,000 should suffice. Just enough to cover emergencies while you whittle away at your debt.

If you cannot find a better deal, then go ahead and move on the Mazda. The $475 per month that you free up will definitely help pay off that massive CC debt. However, you better have more money that you can throw at your CC debt. It will take a LONG time to pay off your CC debt with just $475 per month.

Should you wait until you are no longer under-water with the loan, or act now? That is a tough question to answer. First of all, time will tell. If you can find a better car deal tomorrow, then great! If it takes you two months, then fine. Secondly, it will depend on whether or not your creditor will release the lien on the first car. They may, as long as you take out your next loan with them, or at lest sign a note to pay off the negative equity. It may be a good idea to feel them out ahead of time; at least that way you can see if it will be an easy conversation, or a tough one.

Also to note, my current vehicle is still under warranty for the next 5 years, 60,000 miles and has all maintenance included for the first 2 years. Despite it's bad fuel economy it will hold its value extremely well throughout it's life.

This is a moot point. You are paying for all that warranty and maintenance with the higher price of the car, and the interest. At this point, this is a sunk cost, so it should not come into your analysis.

Keep your chin up and keep at it! You will get through this.

[Sammydabullz]

Well in order to keep the car loan from killing your credit. You could trade it in at a dealership for an older vehicle. The dealership will payoff the car loan for you without it damaging your credit. Unfortunately if you don't want to pay out much cash in the deal, you have to trade for a pretty old and high mileage vehicle because the remaining balance (payoff minus trade in value) is still your responsibility.

[David James]

This is a moot point. You are paying for all that warranty and maintenance with the higher price of the car, and the interest. At this point, this is a sunk cost, so it should not come into your analysis.

I understand that the warranty and maintenance aren't actually freebies, but wouldn't the OP need to add the usual maintenance fees and possible mechanical problems of owning a used car to balance the equation? At least the OP knows exactly how much the monthly payment is right now, whereas the used car's upkeep is a wild card. New cars also come with new tires, which is another cost to consider.

If it were me, I'd keep the car since you can afford the payments and it just seems like you're trading in one problem for another. If you trade it in or buy/sell so soon, I think it will impact your FICO score too. Your insurance seems quite high. If it were me, I'd shop around for cheaper insurance - see if joining a club will make it lower or taking a defensive driving class, and just shop around in general. You've probably done that already, but I wanted to add just in case. As you pay down the vehicle and keep paying on the cc debt your FICO score should improve. Then I'd try contacting the cc companies and asking for a lower rate.