Trade Your Car For Millionaire Status!

In a previous post, we talked about how having a car payment throughout our adult lives can cost us more than a million dollars in our retirement.  If you haven’t read it, go back and check it out.  I have shown us the math and how having a car payment can keep us from millions in retirement, but what if you have already gotten into a car payment?  How do we get out of it, and what do we do if our car is underwater (owing more than it's worth)?

The first question we always need to ask ourselves when dealing with a decision like this is “What are my priorities?”.  The reason we do this is that it might be worth it to you to have that car payment and sacrifice some retirement or some other financial goal.  If that is truly how you feel about it, you will never feel good about getting rid of the car payment.  It will just make you conflicted and frustrated.

However, if you are more like me and see that you’d rather sacrifice the car with a payment and are okay driving a lesser car so you can reach your retirement goal(s) more quickly, then this process may be easier for you to accept and you'll be more likely to actually do it.  Your answer to that question will direct your path.  Let me disclaimer this topic by saying having a car payment, just like a lot of other financial decisions isn’t a terrible and sinful thing, it's not about right or wrong, good or bad (in most cases).  You need to do what you need to do, not just blindly follow what I or others say. 

In some cases though, there are smarter and easier ways to get ahead financially, and that is what I want to share with you.  I feel it is my job to help us all understand the actual math, then you can make decisions for yourself.  I also have been on both ends of this discussion and from my personal experience and the research I’ve done, the car payment (as mentioned in my previous post) is one of the biggest reasons a lot of people don't build wealth long-term and feel stuck in their current financial situation.

Okay, with all of that said, let’s move on to addressing those of us who want to get out of our car payments.  There are several ways to do this, but some options are better than others if we want to achieve our goals faster.  I am going to list these from worst to best and then talk about each option.

• Stop paying the car payments and let the creditor take it back (repossession)
• Turn your car back into the dealer you bought it from
• Trade-in your car for a cheaper one at a dealer
• Sell your car to a private buyer

1. Repossession – When we get into a financial mess and stressed out, options like these can seem like good ones because we think it’s an easy out.  Almost like erasing something from a whiteboard. Unfortunately, we can't erase things like this and expect them to just go away.  Just like bankruptcy or foreclosure, the repossession may feel good at first because it provides immediate relief, but little do we realize, it’s what comes after the relief that can haunt us for decades.  Here is the actual process.  In a repossession or "repo", if you get far enough behind, the credit company comes and takes your vehicle back, but instead of wiping out the debt equal to what is owed, they sell it in an auction.  This means they will get FAR less for it than is owed, and guess who pays the difference…yup, you do.  In most cases, they will end up suing you for the difference.  This is a bad idea and not helpful to our situations, so we want to avoid this option.
2. Turning your car back into the dealer – In this situation, most people think to themselves…"I made a mistake by buying this car, so I’ll just give it back”.  The problem here is even though it isn’t like a repossession, the dealer calculates what they can sell it for, and offers you significantly less for it so they can pay off the loan and also make a nice profit when they resell the car.  So, in this scenario, you also will get far less than you owe on it, causing you to come up with the difference.  The other problem is that cars depreciate in value very quickly on the front end.  So, if you have a newer car, the chances of it being upside down are quite high in the first few years of purchasing them.
3. Trading your car in for a cheaper vehicle – This seems like a good option doesn’t it?  I’m trading my more expensive vehicle for a cheaper one so my payments will go down.  Well, that’s the only good news here.  The problem with trade-ins is the same as in our last scenario.  The dealer needs to make a profit on the resale of the vehicle so they will offer you far less than it is worth on the open market because they need the profit to stay in business.  Plus, with depreciation, your car is worth a lot less.  Then, you have to calculate that you are paying more for the cheaper car than you could get it for in the open market.  Also, if there is a deficit on your loan to value, they will roll over your negative equity into your new payment.  You end up owing more than the lesser car is worth as well.  This isn’t good math either.
4. Selling your car on the open market – This is the most profitable and best way to get rid of your car payment without losing significant money on the deal.  In fact, this is most often the best way to buy or sell any vehicle.  You’ll get the best price when selling AND the best price when buying.  You need to sell the vehicle on your own to a private party who will pay you what it is actually worth.  If you owe more than it brings, you’ll have to borrow or come up with the difference so you can get the title to give to the buyer.  You will also need to find a vehicle to drive until you save up enough money to purchase your next car with cash.  Then, you are on your way to putting that money you used to pay on a vehicle toward your other goals, which as we found in the previous post, could be worth $1 million or more over the 30 or 40 years of growth.