I'm two years into a five-year car loan. When I purchased my car, I traded a vehicle that I was still paying off so my total loan was $32,000 even though my current vehicle was only worth $27,000 new. My payments are more than $500/month, which is a strain for my financial situation, and I'm regretting the decision to purchase a new car. If I sell now, I'll still owe the bank a large chunk of money. Should I sell the car and cut my losses, or continue to make payments for another three years? What are my options? – Anne in Aldergrove, B.C.
Assuming that you don't have a wealthy German relative with an interest in bailing you out, you need to find the best path to satisfy your practical needs, while minimizing the impact on your finances. Unfortunately. it seems that you're now at the point of damage control, but all is not lost. This may just mean it takes a little while to work your way back to a comfortable position.
It's good that you're considering your options. Leaving it too late could result in a worst-case scenario, i.e., a repossession, or what's referred to as a "quit claim," in which you'd lose any equity you have in the vehicle.
"This includes handing back the keys, which is also known as a voluntary repossession. Basically, it will stick on your credit bureau for seven years, and it's unlikely you'd be able to get another loan in that time, at least not with a mainstream lender. It's certainly the least of the options I would ever recommend," says Ben Letkeman, senior manager at Vancity's Chilliwack branch.
The current value of your vehicle depends on the particular make and model – but in any case we know that depreciation is always steep in the first two years of ownership, i.e., your asset has taken the biggest hit.
Obviously, it's not ideal to buy high and sell low, but if your financial situation has become really strained, and assuming the car is in solid, salable condition, it may be advisable to make a dent in your debt, and stop those $500-plus payments. I would consider this the best option if a) you don't really need the vehicle for life's essentials, and b) you can find a cheaper loan than your current deal for the amount left owing.
If you still require an automobile to get to, or perform your work, then it's a different story. Even if you sell and deal with the remaining loan, you'll probably need to turn to a bargain-basement "beater" – and find the money to pay for it. With this option, you'll also be on the hook for any repairs as presumably your purchase would be off-warranty. At this point, it doesn't sound as if you have any money stashed away for life's surprises.
You mention that you arranged your financing through a bank so why not head into your financial institution to discuss your options?
"Really the best bet is to go to your bank, have a conversation with your banker and let them know you need some help. Whether it be budgeting, some amortization or a lump-sum payment – perhaps a little bit from a bonus – ask 'how can I make this manageable?' Speaking on behalf of us anyway, we would look at that situation if the person is employed and has been for a period of time, and work with them to try and get them out of that situation," says Letkeman.
Extending your loan is one option. It may not be ideal, as you end up paying more interest when the loan is spread over a longer period – but it may be necessary to make your monthly payments more manageable.
If your car is not essential, sell it and try to find a cheaper way to settle the remaining debt. If you really need the wheels, head to your bank to find a way to re-jig your financing, or perhaps review your monthly expense budget so you can hang onto your car, and get the most value from your existing purchase – and remaining warranty.
E-Mail your car questions to Ask Joanne at globedrive@globeandmail.com
Joanne Will