Car Payment Reduction

[cachorro]

Hi everyone,

I'm new to the site and will appreciate your insight on the following situation:

My wife and I purchased an SUV a couple of years ago (used). Since then given the Gas price fluctuation the "value" of SUV's has significantly gone down. Basically we now owe about $7,500 more than what the car is worth.

We want to get rid of the car so we can get something else and lower our monthly payments in order to save that money but feel trapped given the value of the vehicle.

Getting a different car would save us about $300/month so eating the $7,500 by selling the car would take us over two years to recoup that payment - hence I don't think this is the best option.

Any insights, comments would be welcome.

Thanks!

[maat55]

Outside of investing in a company 401k to the match only, I would be using all extra funds to payoff the car.

I'm a big believer in paying cash for a car, so I would look at selling and buying something for around 5k or less leaving myself with 12k or less debt to payoff as quickly as possible.

Our current plan has us saving 400 per month and replacing a car every 2.5 to 3 years with cash. This means that after we buy a 1 to 2 year old car, it will be driven 5 to 6 years, then sold and added to current savings for the replacement. If necessary, we pay for repairs out of the car fund.

This plan also keeps us with money in the bank and no payments.

[jIM_Ohio]

You gave us a micro view of whole situation.

1) How long did you finance the SUV for?
2) How many years are left?
3) (comment) you would have owed more on car than it is worth regardless of SUV or other- cars lose value once you drive it off the lot.
4) What is the budget like?

My take is keep the car if payments are over with in 2 years or less and drive the SUV into the ground (keep it till it does not run).

Once you are done paying off the car, bank the car payments so the next car is paid for in cash.

If fuel costs are driving the decision, how much is fuel per week? per month? per year?

If fuel costs you $45/week (~$2500 per year) now, a more fuel efficient car might cost you $25/week ($1300 per year).

To save that $1200 you would be willing to owe another $7500?? You need to plug your numbers in (I guessed at fuel costs).

I have a 4WD pickup which gets less than 20 mpg. At the time I bought it I needed to haul stuff. I do not anymore- so it is clearly fuel inefficient for my daily commute.

I owe another $17000 on the truck
Costs me $20/week in gas ($1040 per year). I fill up once every other week for about $40.

I could knock my fuel cost down to $10/week if car got 38 mpg in city. But I would owe the other 17k plus the cost of the new vehicle. If I keep the vehicle and drive it into the ground, I get my $700 payment back in 24 months and can then save for a more cost effective vehicle the next time around.

If the only reason to trade a car in is to be more fuel efficient, it is often a lose-lose proposition. If the car payment itself is the issue with the car, then that is a different situation (which is why I suggested posting your budget is in order to discuss situation more).

[Tree0164]

Alot more details needed but I would agressively try to pay off the car rather than selling it. Your probably not going to recoup that loss.

How about a budget etc that you can give us.

[cachorro]

Thank you all very much for your replies. The loan on the car was an 84 month loan (I know... I know.) We have 5 years left on it at a rate of 5.25% fixed.

We are fine keeping the car if necessary but the possible escalating repair costs, plus fuel costs (12 miles to the gallon,) and $600/month payment were concerns. Thankfully the fuel costs are not as difficult now that gas is more affordable.

It would be hard to get into all the details of our budget but to suffice to say that we are trying to lower costs as much as possible so we can save more than we are saving now. We are shaving money left and right and canceling many things that seemed necessary but really were not. Thankfully we don't have any credit card debt anymore as I've just paid all that off.

A quick summary:

- We own 5 investment properties that when put together including all mortgages, expenses, taxes, etc. amount to a monthly loss of about $1,750. This wasn't that big of a deal when their value was increasing 20-30% yearly. Its a much different picture now and although they are all rented thankfully we are somewhat stuck looking at these as long term investments. If we were to try and sell now we would just about walk away clean from all of them save for the selling expenses. Amazing - we went from having 1.2 million in equity to nothing in 10 months flat on these.

- We have two cars. My wife's SUV at $595/month (purchased) with the details I mentioned above. My car is on a 36 month lease 2006 at $660/month which will end in May of 2009. My idea with my car was to return it at the end of the lease and lease another one for half the price if not less. I own a company that allows me to write off the lease of the car but to be honest that's a whole other question I don't think I've ever gotten a clear answer on: To lease or not to lease. It just never made sense to me to put after tax dollars into a purchase (car) that would immediately begin loosing money (depreciation). I would rather lease the car for as little as possible, write off the lease and invest the rest. Your thoughts here are appreciated as well.

We do have some medical bills we are paying and with two kids groceries, and everything else like birthday gifts for family members and friends keep racking up monthly costs. Overall we are just making it by and are able to save very little. Sometimes nothing sometimes $500 sometimes $1,000 per month. Each time we save a good amount something happens - appliances die on us etc. you know the drill - life.

So - I'm sick and tired of being sick and tired of being in this position. We make a good amount of money and should be able to save much more than what we are saving now. Hence my original question regarding the car.

Thanks for your help - sorry for venting a bit.

[Tree0164]

Your cars and the housing are dragging you down. I would sell your wife's car even though you are upside on the loan and buy a cheap car.

Do you have a budget.... how about posting it.

[brianj]

Your cars and the housing are dragging you down. I would sell your wife's car even though you are upside on the loan and buy a cheap car.

Do you have a budget.... how about posting it.

But if you are upside down on a auto loan wouldn't that leave you with a deficit owed to the auto lender?

[jIM_Ohio]

I would post a detailed budget.

If you can depreciate the cars thru the business or lease pre-tax through the business, either is a good deal. If you purchase you can probably remove the car payment from the budget for around 5 years or maybe 10.

Finance for short amounts of time (like 2-3 years) and not 6-7 years, I think you will see savings skyrocket.

I would not be satisfied with losing $1750/month on rentals- does your tax return get this back (through depreciation). Probably not- so then sell and cut losses now. Way too leveraged, IMO.

[Tree0164]

But if you are upside down on a auto loan wouldn't that leave you with a deficit owed to the auto lender?

It would however getting a cheaper car and then taking a personal loan for the difference might be the best way to go.

Honestly if you can't afford to pay off the car in 3 year or less you shouldn't be buying the car.

[maat55]

But if you are upside down on a auto loan wouldn't that leave you with a deficit owed to the auto lender?

Your upside down anyway. By selling and buying a beater, you will be the same upside down but with less debt. The idea is to reduce debt to recover quicker.

[nmboone]

Wow, I hope that SUV is made of gold for it to cost almost 50,000 (84m x $595)! If it were you could just melt it down and make a profit, lol! That really sucks. I would sell it as soon as possible after paying down the loan as much as possible. Also this may be obvious, but sell it privately and absolutely do not screw yourself and trade it in!

[sakigt]

Although I can see why you would want to get rid of that truck payment, it appears as if you wont be able to do so unless you start making double payments for a while. 7 years...sheesh.

To me it sounds like it would be better for you to start attacking other bills that are leeching from you. The second lease sounds like a good start, along with the insurance it requires, grocery spending in line? Utilities?

[cachorro]

Thank you all for your comments. Heighsight is 20/20 so yes - I would not be purchasing the exact same vehicle now much less with the same terms. We bought it because it was a large and safe vehicle for my wife and kids at the time.

The rentals we have are all in a position on their value that we simply cannot offload them. So we are somewhat stuck looking at those as a long term investment (for now) until their value goes back up somewhat. That might be 5 years maybe 10 who knows but right now we are upside down on them in value so we have to hold tight on those. We have them all rented and after doing some recent cost cutting we have lowered our monthly losses on those to about $985/month which is doable. (not ideal, but doable).

My lease on the car I have which ends in May of 09 will do just that - end. After that I am going to buy a simple car cash to take care of things. Not sure exactly how much I'll spend on it yet, but it has to be safe enough for my family. We have redone our budget and I have made some changes on how we carry out everyday purchases so that we have a certain amount of $$ to do so and when that's out - it's out. It's just a matter of being much more disciplined with little purchases here and there that end up always adding up to quite a bit. I've setup separate checking accounts that get allowances for my wife and I that I setup each month as transfers from our main account. This way we can track how much we are each spending and where and we get automatically notified of balances each day via e-mail to ensure we don't spend more than what is there and avoid any ridiculous bank fees.

In a nutshell - our expenses total about $13,400/month Including our home, property taxes, utilities, school and nanny (kids), groceries, medical, Cars, Car and home insurance, gas, phones, the loss on the investment properties and a few other things. I've streamed lined everything to the bone so that's as low as it gets for now (until we can make changes on cars and those type of things). Our income after taxes is about $16,000-18,000/month. With this we should have $2,600 - 4,600/month to use towards expanding our emergency fund and paying down debt. We are both on commission sort of speak so income although is steady at this level goes up every other month or so depending on business. Of course, it can go down to so we have to plan for that although its been fairly steady for some time now and we are looking at growing our business.

Bottom line, up until today all the "extra" money at the end of the month had been swallowed up by expenses on a credit card here and there. It's amazing how fast money disappears in little purchases. And that's stopped. Of course it's not the simplest thing to do to put a plan like this in effect in December when Christmas is here but I have to make sure my family is taken care of so we'll just have to get creative on gifts and that's that.

The way I see it now that the budget is in place I'm going to take that extra money and 1st expand our emergency fund to 6 months (currently 2). After that I will take the money and being paying off her car and just drive it until it dies. Then I will take the money and begin paying off the equity line on our house and so on.

One last question - what do you guys think about taking available money on an equity line that is at lower interest rate than her car loan to pay off the car. We would continue to make the same payments but the cost of the money would be less, more of the payment would be going towards principle plus part of it could be tax deductible.

Thanks again.

[minnie1928]

Your car loan is at 5.25% correct? How much lower is the rate on the equity line?

I would be torn on that idea...I have a feeling that if you wrap it into an equity line that it might make it feel easier to get a new/different car (ie-more debt) and that's definitely not what you need.

I would probably take the plan you've outlined above and run with it for a few months, tweeking it as necessary. I would also stop using the cards completely, if you haven't already.

[cptacek]

can you raise the rent to make up for some of the $1000 you are losing?