I would not do it personally.
Your negative 2400 will probably decrease as the car gets older if you bought it new.
So as you are paying on it, you will get above water.
At that point you could trade it in on a different car if you wanted.
Cars depreciate the MOST in the beginning...so if you can ride it out, it gets better.
What is your car payment?
I would take the $750 per month and make that your car payment. You could go back to normal whenever.
Of course, this is assuming you like your car and are just making sure you are being financial responsible.
If you bought your car new, you know it. Assuming you like it, you could keep it after its paid off.
You know it was taken care of (hopefully) and exactly what you have.
It would also have value.
You could also just borrow the $2400 at 0% and pay like $600 extra towards your car each month for the next 4 months. Then you know you are above water and can have more options easier in the future.
If you buy a used car for under $10k, there is no telling what could happen.
Here you are with $750 car payments on a $5000 car that needs $2000 in repairs.
Next thing you know, you are paying 15% interest on an old broken car.
I bought my wife a brand new car and never regretted it because we will keep it and she drives a lot.
My truck is 12 years old but I bought it 11 years ago. I don't drive much and it is paid for and well maintained and saves me from a $1200 car payment to replace it.
Every situation is different, but sometimes a car payment makes sense.
Just my thoughts.
GL!
Either quit watching Dave Ramsey or at least look at both sides of what is discussed.
Avg. Depreciation
1st year = 25%
2nd year = 10%
3rd year = 10%
4th year = 10%
5th year = 10%
Car is paid off and worth 35% of what you paid
and to me much more because I would not sell it for that
if I like it and its reliable.
What is your payment now at 4%?
You love the car.
You bought it new.
You have a great loan rate.
You bought a Honda which holds its value better than just about anything.
Keep it, enjoy it, eat out less if you want to save money.
You already took the biggest depreciation hit.
@Anonymous wrote:
I am in a situation where I am unsure what to do ... Is this a bad idea?
Maybe your question should not be ... is this a bad idea;
instead, maybe ask if this is a good idea.
It sounds like one solution to an end, but there are other
considerations that would help us to give you better advice.
First, what is your main purpose in doing all this? Is it just to get rid of negative equity on the car? If so, there are other ways to do this. The main way would be to just continue making regular payments per loan schedule and with only $2400 upside down on the loan, you should be right-side up within a year or so. With most car loans, you can also pay ahead, no penalty. In other words, interest is computed on simple-interest basis and you don't have a 'prepayment penalty'. So you can pay for example $550 a month instead of $450 a month and pay it off early, as well as getting right-side-up sooner. So you can do this without having to trade the car. Or you could take the BT offer if the overall financial calculations show you'd wind up ahead by doing so.
Why would you want to keep the car? Well, you're already in the loan. The car is a known quantity. Has it been reliable? Do you like it? There is a risk involved in trading for another used car, especially an older one that costs less. You may be buying trouble. A car that you already know and trust is a safer risk. And I'm assuming your Honda is much newer and lower-miles than any car you would buy for $6600. Older cars can save you money but you MUST factor in repair costs. Even reliable older cars simply break down more often. You either pay the monthly payments on newer cars or you pay the (unexpected) repair costs as they occur to keep a car running. If your savings and budget would be stressed to pay for unexpected repairs, you're better off with a car payment on a newer more reliable car that you budget for. If you decide on the used car route, I would highly suggest you put aside an additional $2K in a savings account just for sudden unexpected repairs.
Trading cars too frequently means you're throwing money away in equity. For least cost, buy and hold for many years is the best option. I assume this is a fairly new loan, or within the first year or so? If you're selling the car to Carvana for $19.6, how much did you buy it for? (In other words, what financial LOSS are you taking to rid yourself of negative equity and a car payment?)
PenFed typically charges a 3% BT fee, if I'm not mistaken. So all you're saving over the year is 1% (4% - 3%). But you could still do the BT offer and use it to prepay on the car while keeping the remainder of your loan intack. That would still save you a little money overall.
The $750 monthly payment to avoid getting hit with higher interest charges is a big risk if your budget doesn't support it comfortably. You sound a little concerned about this, so reading between the lines it sounds like it's at least a moderate risk for you not to be able to repay it. If that's the case, I would say it's definitely a bad idea.
For future loans, make sure you keep the negative equity consideration into account. Unfortunately, this happens all too often and people get in over their heads. Having good equity when you drive off the lot with a new or late model car often requires not only good negotiation on the deal but also making sure you have a healthy downpayment in cash or trade-in value. In addition, not stringing out the loan to the longer terms such as the 60 months whenever possible. Most people who find themselves upside down have probably done a little of both: not putting enough value down on the front-end as well as taking long financing terms such as 60 or 72 months. While the longer terms do lower your payments, you are also putting a lower amount towards paying off the principal of the loan each month and the car is also depreciating slowly each month. Basically, your loan payments can't keep up with depreciation and it takes a very long time to get positive equity in the car. If you find you can't put 10% down on a car loan or need to string out the payments, perhaps it's time to reevaluate whether that car really fits into our budget or if we're beginning to make emotional decisions or allowing the dealership to push us towards closing an unwise deal.
@Anonymous wrote:
$384 is my current payment. Its a Honda its very reliable and I am extremely meticulous with how I maintain it as i do all the maintenance myself.
But 384 a month for the next 5 years gives me anxiety. Like thinking I should have been more responsible and just saved money to buy a newer used car outright.
Its not all or nothing.
You can sell it now, next month, next year, whatever.
$384 for a car you love that is under warranty and has resale value is nothing.
I get it, you had a BK and are gun shy.
Popping a 3% "cash advance" with a $750 payment and buying a who knows what used car would give me a lot more anxiety.
Car dealers COUNT on people selling their cars within 3 years.
That is how they make all their money.
That is why depreciation hits so hard the first 3 years.
No demand, no sale.
SLEEP ON IT.
Your car will be worth $2000 less next year.
You would have paid $4800 in payments.
If $400 of that is interest, you are now above water.
You just paid the $2400 you were underwater and did it without going into debt.
SLEEP ON IT.