Are you seriously thinking about getting out of debt? Have you ever wondered if selling your car is a good idea to accelerate your debt payoff? This is a question that I have received a lot lately, so let’s dive in!
Two Reasons for Selling the Car
When you break it down, there are really two scenarios when you consider selling your car. For some of you, your car is a pretty good chunk of your debt, and if you were able to sell it, then your large debt amount would be reduced considerably. For the rest of you, your car is completely paid off and you are considering selling it because it would earn you a chunk of money that you could then put toward your credit card or student loan debt.
Consider These Questions Before Selling Your Car
Before you put your car up for sale, consider these questions:
1) Is Your Car Necessary? – Everyone that owns a car believes that they are 100% necessary – that’s why they own the car. But, what places are truly necessary for you to get to? Instead of driving yourself, could you hitch a ride with someone else? Perhaps someone from work, your spouse, or a friend could get you to or from work. Or, perhaps you live close enough to all the necessary places that you could take your bike or the bus. If you think you can do without your car for a while, then it might be a wise idea to sell it.
2) Is Your Car Worth More Than 30% of Your Yearly Income? – If you earn $40,000 a year and the car you drive is worth more than $12,000, then you likely have more car there than you can truly afford. I recently purchased a very nice car for $4,900 and have received many compliments on it. There is really no need to spend $12k on a vehicle when you only earn $40k in an entire year. By spending less money on your car, you are reducing your insurance costs as well, which will free up quite a lot of cash each month (especially if you were making payments on the car).
How to Sell a Car When You Owe More Than It’s Worth
What if you are driving a car that you currently owe $12,000 on, but the car is only worth $8,000? If you sell it, then you still owe the bank $4,000, which you don’t have. How can you possibly do this?
This is a very real question for a lot of people. They truly want to get out of debt, but they feel trapped. Sure, it would be great to get rid of that big monthly payment, but if they sell their car, then they still owe the bank money. Plus, they might truly need a car and if they sell the one they’ve got, not only do they owe the bank money that they don’t have, but they now have no car. This is obviously a very difficult situation.
If you need a car, you must first save up $2,500 or so to buy an older dependable car (don’t laugh, there are dependable cars out there for $2,500 – I’m driving one right now: my 2001 Honda Civic), and then you can begin to sell the car that still has a loan on it.
In order to sell your car, you don’t necessarily need to save up the difference between the selling price and the amount you owe, but you do need to get your ducks in order. If you do not have the money to fund the difference, then you need to talk to your bank. Let them know that you really want to pay back the loan, but are having trouble making the payments. You feel that it would be more responsible if you sold the car that you can’t afford, and then take out a small personal loan from the bank on the difference. With more manageable payments, you should easily be able to pay them back in a timely manner. If they are wise and were paying attention to what you were saying, they should agree to this and offer you a loan on the difference (which you will then of course pay off as fast as possible). If your bank won’t do this, then start heading to other banks to see if you can get a small unsecured loan from them. Once you get the green light on this, then you can sell the car.
Life Without Your Car Is Worth It
When I started getting serious about my debt, I sold my 2007 Altima. It was a great car, but I don’t really miss it that much. It was just a car. Being debt free is way more fun. If you are wondering whether you should sell your car, it is most likely a good idea. Not only will you not have that car payment, but you will also avoid paying for gas, maintenance, and insurance! You will save a ton of money and be able to get out of debt so much faster than you originally planned.
Do you think you’re ready to sell the car?
AUTHOR Derek Sall
Derek has a Bachelor's degree in Finance and a Master's in Business. As a finance manager in the corporate world, he regularly identified and solved problems at the C-suite level. Today, Derek isn't interested in helping big companies. Instead, he's helping individuals win financially--one email, one article, one person at a time.