What to do with an expensive, upside-down car loan?

Question

Unfortunately, my wife had a car before we got married. She got the car a year or so before we met and now we still have the car. Her mother offered to pay for the car (my wife was still a student at the time).

The crooks at the auto dealership completely took advantage of them by selling them a car with a completely marked up sticker price with a high interest rate. To be more specific, she bought a completely stock 2008 Chevy Cobalt in 2008, which at that time a new, completely stock Chevy Cobalt cost around $13,000. They however, sold her the car for a sticker price of $18,000 at an interest rate of 25%. Yes, 25%. 3 years into it (and 3 years left), the payoff amount is around $12,000.

Her mother routinely falls behind on payments and will avoid my wife if she's late. Every so often, my wife is forced to pay a payment of $500 to avoid repossession. My wife is the sole source of income right now, as I am a full time PhD student. Paying for the car wouldn't be a big issue, but unfortunately, my wife's job only pays $12 an hour, so $500 per month is a big expense.

We have an emergency fund saved up, and I have about $15,000 in savings from when I previously worked, but I am reluctant to touch that. Any advice on what to do to address this situation would be greatly appreciated.

Answer 1

First suggestion: Investigate refinancing the auto loan with a reputable credit union or bank.

I reduced my costs by changing my auto loan to Pentagon Federal Credit Union, which charges about 4% interest rate (compared to 6% which was the standard about 2 years ago). (for instructions on how to join penfed, look at my other post here.)

Second suggestion: get involved with the better business bureau. 25% interest is ridiculous, I would file a complaint against the auto dealership.

Answer 2

If you can't sell it, refinance the bugger. Even if you can knock the interest rate down to 8% and take out a 3-year loan, you'll save about $100 per month. Or really kill the payment (but pay more interest) by taking out another 6-year. A 6-year at 9% on $12k is only $215/month.

My credit union routinely advertises specials on car loans. It shouldn't be difficult to get out of the usurious loan you have now.

As for others' advice about getting another job, having been a PhD student I hesiate to suggest that you get another one, because your job is probably your life right now. But can your wife (or even you) start a blog on a subject that interests you? A few posts a week add up over time, and pretty soon you have a real asset that can be another basket to put your eggs in.

Answer 3

Does the full time PHD student extend to 70-80 hours/week or more? If not, can you pick up an extra job to aid with living expenses?

Also, whose name is the debt in? Is your wife paying to avoid the black mark on her credit record or her mother's?

Basically what it looks like to me is that you guys currently have a car you cannot afford and that her mother doesn't seem to be able to afford either, at a ridiculous interest rate on top. Refinancing might be an option but at a payoff amount of 12k you're upside down even when it comes to the KBB retail value.

I'm somewhat allergic to financing a deprecating asset (especially at a quick back of the envelope calculation suggests that she's already paid them around $18k if you are indeed three years into the loan). What I would be tempted to do in your situation is to attempt to negotiate a lower payoff to see if they're willing to settle for less and give you clean title to the car - worst thing they can say is no, but you might be able to get the car for a little less than the $12k, then preferably use your emergency money to pay off the car and put it up for sale. Use some of the money to buy her a cheaper car for, say, $4k-$5k (or less if you're mechanically inclined) and put the rest back into your emergency fund.

The problem I see with refinancing it would be that it looks like you're underwater from a balance vs retail value perspective so you might have a problem finding someone to refinance it with you throwing some of your emergency money at it in the first place.

Answer 4

An option that no one has yet suggested is selling the car, paying off the loan in one lump sum (adding cash from your emergency sum, if need be), and buying an old beater in its place. With the beater you should be able to get a few years out of it - hopefully enough to get you through your PhD and into a better income situation where you can then assess a new car purchase (or more gently-used car purchase, to avoid the drive-it-off-the-lot income loss).

Even better than buying another car that you can afford to pay for is if you can survive without that car, depending on your location and public transit options. Living car free saves you not only this payment but gas and maintenance, though it costs you in public transit terms.

Right now it looks as if this debt is hurting you more than the amount in your emergency fund is helping. Don't wipe out your emergency fund completely, but be willing to lower it in order to wipe out this debt.

Answer 5

You could do a voluntary repossession.

While a repossession never looks good on your credit a voluntary repossession is slightly better.

A good friend of mine had a situation like this about 11 years ago. She was in an accident didn't have replacement coverage insurance and was left with a large chunk of debt on a wrecked vehicle that she then rolled into a new car.

In the end it came down to the simple fact that she could not afford a car loan on a vehicle that never was worth as much as she owed. Since the car was worth less than the loan she really couldn't sell it to fix the problem. She called and arranged a voluntary repossession. She stopped making payments, and parked the car till they came and picked it up. (Took about 4 months and 20 phone calls from her for them to come get it.)

In the mean time, I purchased her a much older used but decent car for a couple thousand and she paid me back over the next year. The total she paid me back was less than the money she would have paid in the 4 months it took them to come get the car. In fact by the time they picked up the car she had paid back over half on the car I bought her.

Yes the repossession did stay on her credit for seven years but during that time she was approved for a mortgage, cellphone plans, and credit cards etc. Therefore I don't know that it did that much damage to her credit.

When her car was sold at auction by the repo company it sold for much less than the loan amount. Technically she was on the hook for the remaining amount. The outstanding balance on the loan was then sold several times to several different collection agencies. Over the years since then she has gotten letters every now and then demanding she pay the amount off, she ignores these. Most of these letters even included very favorable terms (full forgiveness for 20% of the amount) At this point the statute time has run out on the debt so there is no recourse for anyone to collect from her.

The statute time limit varies from state to state. Some states it is as long as 10 years in others it is as short as 3 years. What this means is that counting from the date of the repossession, incurrance of debt, last payment, or agreement to pay whichever is later if the statute period has elapsed and the lender/collector has not filed a suit against you by the end of the period then they have effectively abandoned the debt and cannot collect.

Find out what that period of time is in your state. If you can avoid the collection agencies till that period runs out you are scott free. You just have to make sure that you do not ever send them any money, or agree to pay them anything as this resets the calendar. If you do not want to wait for the calendar to run out if you wait long enough you will probably be offered favorable terms to pay only a fraction of the remaining amount, you just have to wait it out.

Note, I normally would not endorse anyone not paying off their debts. However sometimes it is necessary and it is for this type of situation that we have things like this and bankruptcy.

Answer 6

The answer depends on your wife's overall situation, whether you are in a community property state, and other factors.

I'm assuming that since your wife paid $5,000 more for a car than it was worth, has a six-year, 25% auto loan and you talk about repossession as a routine event, that her credit history is extremely poor. If that is the case, you're unlikely to be able to refinance, particularly for more than the car is worth.

You're in a bad situation, I'd look for a legal clinic at a nearby law school and find out what the law says about your situation in your state.

If she has other debt, your best bet is to put the car in a garage somewhere, stop paying and demand better terms with the lender -- threaten bankruptcy. If they don't go for it, and your wife has other debt, she should look into bankruptcy. Given the usurious terms of the loan, you have a fighting chance of keeping the car in a Chapter 13. Find out and the legal implications for this before proceeding.

If she doesn't have other debt, you need to figure out to get the thing repossessed on the best possible terms for you.

If it's her mother's car, you're in a moral dilemma.

Bottom line, get rid of this thing asap. And make sure that going forward you are both controlling the finances.

Answer 7

the best thing to do is file bankrupt. your credit will be shot for 7 to 10 years. however usually 3 years after the bankrupt people will give you small lines of credit. then you rebuild on the small credit lines. and never get into a bad loan again you learn from mistakes. there is no shame in a mistake if you learned from it. I rebuilt my credit by using fingerhut. small credit limit on a cap 1 credit card 300 dollars unsecured card. personal loan of 1500 dollars to buy a old clunk for a car as I did not want to have five years of car payments. you can also get a secured credit card. and build credit with that. the bank will explain how to build credit using your own money. also you should know a lot of banks like your bankrupt stat. because they no you cant file for several more years. meaning if you don't pay your loan they can garnish you and you cant file bankrupt. you can get a new car loan with good interest rate. by taking 5000 dollars of your 15000 dollars savings down on the new loan. making your new car loan have better payments cheaper and better interest. and get a secured credit card of 2000 to build towards a unsecured credit card. keep all your new credit tabs small and pay on time.i would not use all your nest egg savings. that is not smart. get a lawyer and file. stay in school you will have a fresh start and you learned about upside down loans. don't listen to people trying to tell you bankruptsy is bad. it in a lot of ways gives you the upper hand in a no win debt or debts.