Sometimes the Answer is Not to Sell the Car

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Spend any time at all listening to those financial shows and you’ll hear a caller with a question like this:

Before I decided to payoff all my debts I bought a car brand new and now I owe $24,000 on it but the most I can get for it is 12,000.  What should I do.  The expert then says to take out a loan for the difference and sell the car.  

Some hosts will add that you should take out an even bigger loan to buy some beater to drive instead.  A recent one suggested that you should take out a $15k loan so that you can buy a $1000-$2000 car.  So the caller will then have a $1000 beater with a $15k loan vs their nice car with a loan for 23k.  Unless the caller will lose their house if they don’t sell, I would keep it and continue looking for other ways to earn income.

Let me say that I completely disagree with this expert logic and here’s why:

First of all, have you looked at what $1000 buys you today?  If you’re lucky it’s a death trap which needs $1500 worth of repairs to make it safe let alone reliable.  Now if you were paying cash for this car then maybe I would agree but you won’t be paying cash in this example.  You’ll be paying off a $15,000 signature loan.  Notice that I said a signature loan not a car loan.  What’s the difference?  Collateral and because of that, interest rate.  At my local credit union a signature loan of that size is 12% interest.  Back when I had a car loan I was paying 3% interest.  So not only am I giving up my nice safe reliable car but I’m quadrupling the interest?  How is this helping me?  Some signature loans are only for 24 or 36 months.  $15000 @ 12% interest for 36 months is nearly $500/mo.  I’d be willing to bet that their “new” car is cheaper.

Look, this doesn’t apply to every situation.  If you have a $40k truck and can get $36k out of it then by all means get the loan and sell the truck today.  My argument also doesn’t give you the right to be stupid and buy a new car when you don’t need and/or cannot afford one.  My point is simply that you must use your calculator and do what makes sense.  If you can continue paying on your vehicle and then drive it for a few more years with no car payments, you will end up further ahead than this so called expert advice.