A lot of people these day are realizing that they are "upside down" on
their car or truck note. That means that they owe more for the vehicle
than it is currently worth.
The truth of the matter is that they were most likely "upside down" the day
they drove off the lot. If you purchased a brand new vehicle and still
owed money on the vehicle you were driving, chances are that the finance
company rolled your old debt into your new loan. That's called "piggy
backing." In addition, if you had no collateral and no down payment, you
probably had to accept a higher interest rate than a purchaser with no
previous debt and a down payment. When many people realize that they are
"upside down", their solution is to let the vehicle go back to the finance
company.
That solution is very short sighted and only creates more financial
problems for you in the future. You are putting yourself in deeper debt
down the road. Now you don't have anything to drive and you have a repo on
your credit report. That makes you even more susceptible to lower quality
vehicles at higher interest rates in the years ahead.
Let's do the math. If you have already paid $600.00 a month for 30 months,
that's a total of $18,000.00. This total does not include extras like new
tires, a spray-in bedliner, a satellite radio, routine maintenance expenses
or anything else that you might have added since you purchased the vehicle.
Why would you want to give $18,000.00 and all your added extras back to
the finance company plus your vehicle? Now what will you drive?
There are more problems in store. More math. Let's say you still owe
$15,000.00 and the finance company sells your vehicle for $10,000.00. They
will most likely file a lien against you for the $5,000.00 they lost. That
will haunt you for years. And here's the real kicker. When you let your
vehicle go back to the finance company still owing $15,000.00, the Internal
Revenue Service considers the difference between what you owe and the
amount the finance company received for your vehicle income. At the end of
the year, depending on the type of loan you took out, you can very likely
get a 1099 form from the IRS demanding that you pay taxes on your
additional $5,000.00 "income." If you are in the 30% tax bracket, that's
an additional $1,500.00 you will have to pay the IRS. Now you have spent
$19,500.00 (not including extras and add-on's) and you still don't have
anything to show for it and you still don't have anything to drive.
Check to see if you can refinance the vehicle to lower your monthly
payments. If you only need relief for a couple of months, check to see if
the finance company will let you miss a payment or two and tack that amount
on to the end of your loan. If at all possible, continue to pay for the
vehicle. The industry standard dictates that you will be right side up in
about five years. That means that in another 30 months your vehicle will
be worth what you owe. If you do regular oil changes and properly care for
your vehicle, you can probably drive it another five years (at least) after
it's paid for. I realize it is an up hill battle but there is an end in
sight.
Once your vehicle is paid for and you drive it another five years, you can
sell it and use the money for a down payment on your next vehicle. You
will have a terrific credit report and get a lower interest rate. Also
keep in mind that there are thousands of perfectly good used vehicles
available. Not everyone can afford a brand new vehicle and that's okay.
All of this may sound foreign to a lot of you in today's economy. Many of
my friends have created the mindset that they will always be in debt. With
proper planning and focused purchasing, you can slowly become debt free.
Consciously decide, do you want to go to the grocery store or eat out? Do
you want to go on vacation or spend the week making your home a nicer place
to live? Do you really NEED that new pair of shoes or do you just WANT
them? Resist the urge to charge intangibles on your credit card. You'll
get the bill and have nothing to show for it. Save up for things you would
like to do. It's very rewarding.
Many people lose sight of the fact that they CHOOSE to be upside down.
Visualize being "right side up" and work toward that goal. You're not
getting any younger.
© 2005, Cindy Staudenmaier
