I Owe $30,000 on My Car Worth Only $20,000 – How Can I Escape This Financial Mess?

One of the most aggravating aspects of buying a new car is that almost immediately after you drive it off a dealer’s lot, its value drops. There is virtually no exception to this, no matter the brand name or the dollar value of the car, it drops as soon as you drive away.

This is something one Redditor is learning the hard way, based on the deal they made. Things went from bad to worse when they realized that not only does a car drop in value, but with interest, you can owe more than its worth. This is where car dealers get you, and it’s why the industry has such a nasty reputation.

Owing More Than a Car Is Worth

According to this Redditor’s post in r/personalfinance, they currently owe about $30,000 on a vehicle that is only worth $20,000. In many ways, this is just the nature of the beast that is the automobile industry, and it’s what is more commonly known as having “negative equity.”

Anyone with negative equity is essentially in the same position as this Redditor, owing more on a car than it’s worth. In this Redditor’s position, they have a monthly payment of around $886 plus an additional $200 for insurance, so they feel as if they are paying “rent” on the car, given the price tag.

The Redditor believes they can’t refinance due to the financial situation, so selling it is an option, and then rolling the negative equity into something less expensive. The challenge is that doing so might not help the situation, as the Redditor might end up with an equally high payment because of this negative equity.

The other option for this outrageous 20% interest loan due over 75 months is to give up and surrender. The problem here is that voluntary surrender almost never works in the car world, and you end up in exactly the same place owing the exact same amount.

So, what should this Redditor do?

What Not To Do

At the very least, this Redditor needs to absolutely, positively, stay away from rolling over this negative equity into another vehicle. In a circumstance like this, they would have to get a vehicle that is less expensive as is, but with the negative equity, even if they could negotiate a little and drop the $10,000 shortfall down a thousand or two, it wouldn’t make any major difference.

Consider this: with interest, every $1,000 on a car loan averages between $20 and $30 in payments. This means it would take considerable negotiating to significantly alter the price of their next vehicle.

Most importantly, this Redditor needs to be far more aware of their actions in the future. Their interest rate, at 20%, strongly qualifies as “predatory,” and while they signed the paperwork, this is a lesson in how interest works for the future. Ultimately, given the scenario, the Redditor is likely to end up paying approximately $64,950 for a vehicle that we can only imagine MSPR’ed for far less.

How to Move Forward With This Vehicle

If I had the chance to speak with this individual or knew them personally, I wouldn’t sugarcoat my advice. The first thing I would add is that the very best solution here is to keep paying on the car until it’s paid off. While this might not be what this Redditor wants to hear, it’s the least problematic solution available right now, at least until they earn more income and put more money down on a vehicle to offset negative equity.

There is always the option of trying to sell it privately in the hopes of clawing out a few more thousand, but it would still leave the Redditor with a balance of thousands to pay off on his own.

Knowing that the Redditor doesn’t have the free cash to pay off the balance, and this is already after three years of ownership, so they have been enduring this hardship for at least 36 months. However, if the Redditor gets back into bartending as they suggested, my advice would be to pay off a little more than the payment each month to help cut down on the principal. Even an extra hundred or two hundred a month from bartending will help cut down on the loan amount in a significant way over time.

Whatever this Redditor does, borrowing from a 401(k) is a non-starter, and this cannot be said strongly enough.

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