Getting debt-free

[fraggable]

Hello all,

I am currently 25 years old and about a month ago finally got married. We're currently living in an apartment and would like to plan to buy a house in about 2 years. I know it's a great time to buy now, but we just don't need the space and we're not in a good position to do it, as I'll explain.

When I was 22 I bought a 2007 Malibu (new) and drove it for about a year, after which I traded it in for a 2008 Pontiac Torrent. I know, you're all shaking your heads at this point and I don't blame you. I was stupid about it and ended up where I am now, roughly $8K upside-down (if you assume KBB private party value) in a 7-year loan that I'm only 10 months into. My spouse has a sensible 05 Toyota Camry, financed with a friend of the family at 0% interest, paying about $300/month with ~9K left to pay.

I want to fix the mess I'm in and am trying to determine the best course of action. The way I see it, I have 2 choices;

1. Sell the Torrent privately now and end up with ~8K in unsecured debt, then buy (possibly roll at least some of that into a loan for) a much cheaper car, around $7K with a 3 year loan.

2. Keep the Torrent for about a year, refinance for a 6-year loan saving me $20/month and pay an additional $150/month on top of that, closing the upside-down gap, after which I could sell it for a price closer to what I owe and buy the cheaper car.

3. Keep the Torrent for another 6 years, in which case the car payment will exist long into the time we're hoping to buy a house - not ideal.

Is there a 4th option I'm missing, or is that it and I have to make the decision? What do you think?

Much thanks,

[srblanco7]

It's somewhat difficult to comment on the car loan without understanding the remainder of your financials - what's coming in and what's going out. How much saved for house etc... That being said, a 7 yr loan for a vehicle is insane.

Why would you wait to refi the loan? Is it feasible to refi to a 4 yr loan now?

[minnie1928]

Why refi the car? Is the rate horrible or something? If you want to get rid of the loan faster then you need to pay it off faster. Can you get a part time job or sell some stuff? $8000 is a large amount to be upside down so I don't think I'd sell it/trade it too quick.

[EconoMutt]

Why refi the car? Is the rate horrible or something? If you want to get rid of the loan faster then you need to pay it off faster. Can you get a part time job or sell some stuff? $8000 is a large amount to be upside down so I don't think I'd sell it/trade it too quick.

I agree. I'd keep the car and make extra payments.
Keep in mind that if you buy a beater, you'll pay thousands of dollars in repair charges. There's just no such thing as free transportation.

[Merch]

If you like the car, I would just get a part time job and pay off the car early. If you don't like the car, I would get a part time job, and save up cash so when you sell the car you can just give the finace company what you are short.

[wincrasher]

I think you'd be better off doing this:

Sell your wife's car. she'll be able to get a good price for a Camry - probably more than she owes.

You two share the remaining car. This is the sacrifice you'll have to make to buy a house.

Pay extra on the Torrent each month - perhaps $200 or $300 extra to knock it down. Plan on driving it till it falls apart.

Lay out your numbers now - set a spending goal for your first house, considering you'll need 20% downpayment and calculate how much you'll need to save each month to reach that goal.

Plan to have total debt (incl mortgage) no more than 41% of your combined monthly gross. Them's the rules now. Consider if you are going to have kids and if your wife will drop out of work then.

[fraggable]

Well I should have included some more info there.

We make (combined) 70K/year with only about 20K/year comitted to bills other than cars. I'm making $430/month payments on the Torrent now, but can actually afford to put $800/month into it since her income is mostly surplus.

My loan is at 8.1%. My main reason for refinancing is that it looked like I could refi into a 72-month loan (2 months shorter) and have a $410 payment, but in the end I suppose that doesn't really get me anywhere significant.

I thought about this some more last night and here's what my best idea was:

Pay off the Torrent at $800/month + extra like tax returns, etc for about a year till the loan catches up with the value, then sell the Torrent for roughly $14K and buy a ~$7K reasonable car like another Camry on a very short 1-year loan of some form - it would be a few years old but not a 'beater' persay that needs repairs constantly - and keep paying $800/month on it till it's paid for, after which we would put $1100/month into her car till it's paid off.

We're not financially strapped to the point we need to sell one of the 2 cars to make it, I just want to come up with a plan to get out of debt. We have no debt besides the cars - CCs are paid off monthly, etc.