Would You Sell Your Car to Get Out of Debt?

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Just the other day, I read an article about paying down your car loan and the author suggested that a car loan should be paid off before you start paying down your credit cards (if you are trying to get out of debt that is). He had five solid reasons for doing so, but I just didn’t buy it. So, I left my opinion in the comments section:

Derek@LifeandMyFinances says:

All of the reasons make sense, but I just can’t get over the fact that you will be losing more money to that credit card interest (because it will almost always hold a higher percent interest than the car loan). I would recommend selling the car, paying off the loan immediately, buying a $2,500 Buick that will run solid for a few years, and then pay down the credit card aggressively.

I was nearly laughed off the page!

The author agreed that my plan made complete sense, but felt that no one would seriously take the advice because of how much we identify with our cars (“we are what we drive”).

This is total crap.

20140912 - sell your carI mean, yes, I agree that people are quite attached to their cars and will likely not sell them in order to get themselves out of debt, but why the heck not? If you had a car that cost you $450 a month in payments and you were barely making it through each month financially, wouldn’t it make your life a whole lot better to just sell it, buy a car for a couple thousand bucks that will run for a while (there are plenty of these out there), and then live life happily with an extra $400ish dollars in your account each month? Am I just too logical a person?

Reasons why people won’t do it

No matter how logical my advice is, I think the author was right. Chances are that 95% of Americans will not take it. Here’s why:

  • People will likely learn that you are tight on money and might talk about you behind your back
  • Embarrassment for driving a 10-year-old car
  • They “won’t be what they drive” and won’t feel powerful or confident when they drive a hunk o’ junk
  • Each one of us wants everyone else to believe that our lives are amazing and we are in complete control

Basically, we are all afraid. Afraid of what others might think about us if we drive an old, non-stylish vehicle. Do you know what though? Only the broke people are impressed with what you are driving. Those that are financially wise secretly think you’re a moron for spending your future life-savings on a metal box that gets you from point A to point B.

If, however, you choose to buy a cheap Buick and start putting more money into your 401k, the personal finance gurus will start nodding their heads in approval.

Reasons why they should do it

So if you are one of the few that is actually considering selling your expensive car and ditching your payments, here are some reasons that might motivate you to do so:

  • No more payments on the car means that you will have additional money at the end of the month
  • Your car insurance will cost much less
  • You can easily tackle your debt and have even more money left at the end of each month
  • When the debt is gone after a couple of years (vs. NEVER if you keep the expensive car), you can invest heavily and be wealthy for once
  • Your retirement will be lavish and full of fun and memories (vs. a crappy broke life with a sweet car)

You might not think that luxury car payments would really make that much difference, but let me surprise you for a moment. If you are 30 years old and decided to buy a $45,000 vehicle today, you would postpone your retirement for 10 full years. That’s right! Instead of retiring early at age 55, you will have to drag yourself to work for 10 more years until you reach 65 years of age.

By paying for a cheap car with cash, you are saving yourself a life-time worth of payments, saving money on insurance, which will then allow you to invest in your future. You could put your extra money into a 401k. You could invest in real estate. You could even start your own business! The options are endless!

Are you ready to sell your car to get out of debt?

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Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

17 Comments

  1. Sadly, I think most people will disagree with your logic, even though it makes complete sense. It’s why people with no money will be in line for the new iPhone even though the one they have is working perfectly fine. For them, it’s a status symbol. Driving a new car or having the latest phone says you are cool and current. Having an old car or phone says you are out of touch and not successful. In reality though, the guy driving around in the 10 year old Buick with the flip phone probably retired at 50 and is a millionaire!
    Jon @ Money Smart Guides recently posted..My Scottrade Review: One Of The Best Online Brokers

    • You’ve got it Jon! I do enjoy having a smartphone, and I would like a somewhat nicer car, but it will never define who I am. If someone gets to that point, they have some serious confidence issues.

  2. Makes sense to me. As does the idea of retiring early instead of paying off a stupid (and unnecessary loan). I’m looking at alternatives to higher education for this reason too: however much I try to rationalize it, $90k for a graduation certificate is just ridiculous and paying off the debt will likely PREVENT me having the life I want.
    Myles Money recently posted..Make Do & Mend >> #FrugalFriday

    • Good point Myles. I’m curious what your parents think about this logic. I think most would be devastated that their son isn’t going to college!

      • I’m very lucky that they support my idea of taking time off before going to college (or instead of going) to decide what I want to do first. Too many of my friends are going “because it’s what my parents want” or “because my friends are going” but I don’t think those are good reasons to spend the next 3 years of my life chasing something I’m not sure I want or need. If / when I decide to go to college, it will be because I have a plan, NOT because college sounds like fun while I’m figuring out what to do with my life. There are also plenty of ways to get an education without shelling out crazy money… I enjoy languages but I would have a much better understanding of Chinese, for example, if I spent 6 months there than 3 years in college, and at a fraction of the cost.
        Myles Money recently posted..#SmartMoney Roundup

  3. It makes sense if it’s necessary! I enjoy the reliability of my car … it isn’t a status symbol … it’s comfortable, reliable, and I know I will be able to drive it for at least 10 years!
    Jayleen Zotti recently posted..My Financial House – Car Payments

    • I believe that if you are in debt, then it is necessary. What do you think?

  4. My dad fixes up cars and sells them. For my 23rd bday he gave me an awesome Saab convertible. Since he knew We rented an apartment next to Dave’s work so we only needed one car he shared that we could keep the car if we wanted or sell it and use the profit toward paying off my student loans. It was fun driving it around for a few weeks with the top down but we just didn’t need it.
    Jessica @ Budget for Health recently posted..Skip the nutrition label and read the ingredient list

    • Sheesh. Sounds like your dad is WAYYY too nice! I wonder what would happen if the new norm at the office was a 2000 Honda Civic. No one would look down on anyone else, people would have more money to put toward their retirement, and everyone would be less stressful! Sounds like a perfect utopia to me. 😉

  5. I’d sell it in a heart-beat! For all our talk about as PF bloggers ofsmall things adding up, a few huge money decisions made right will go a long way in remedying our financial situations. Car, house, college education. Get those right and you have a head start on your finances.
    Simon E. recently posted..Barnes and Noble MasterCard® Review

    • That’s right! I really have a passion to speaking to young adults about these types of decisions. Many of them just brush me off, but the few that listen will have a fantastic future ahead of them!

  6. Been there, done that!! After completing the Dave Ramsey course and paying off all consumer debt I sold my car (for $8,000) and put it toward the mortgage. Took the bus to work, or carpooled. People thought I WAS crazy, until we paid off a 30 year mortgage in 3 years. All of a sudden, not so crazy!!

    • That is AWESOME! You are my hero Toni. I can’t wait to get my mortgage paid off. According to my plan, it should only take 3.5 more months! 🙂

  7. I sold my car via the Car Buying Co. which I heard listening to Dave Ramsey’s show. They actually gave me a great deal. There was some negative equity I had to pay but in all a great deal. My payments were $560/month

    Then I found a $5000 car with only 56k miles which was in great condition. I didn’t have $5k liquid so I used a 0% (for up to a year) check against one of my credit cards. It is now paid off and now I have no car debt!

    That’s more money I can now invest and save. In the future I will be using cash for all car purchases.
    Ced @ Fuggingdebt recently posted..5 Critical Ways Having Debt Impacts Your Fugging Life

      • Ha, I’m sure there are many that have done worse! That’s awesome to hear that you got out of that car loan. It must feel great having that extra $560 in your pocket each month!

  8. I guess it all comes down to what your priorities are and how much it will impact you if you decide to sell your car. I agree that cars can be a bit expensive even after you bought it and sometimes it would be more economical not to drive it around. If my debt is costing me too much and if selling my car will save me from more monthly expenses, then why not?
    Mike Goodman recently posted..Gaming online – from hobby to a source of revenue


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