How do I exit a toxic auto-loan with the least personal damage?

Question

I spent much of my 20's making very poor financial decisions. I never drove a decent car and constantly found myself on the side of the road or without a vehicle.

Situation

At 29 I made a change in my life which resulted in a degree and a better job that more than doubled my income. Of course the tendency for bad decisions was still there and I decided to get newer vehicle that was marked up 10% above bluebook with a 22% interest rate.

I made $500 / month payments for an entire year and after 12 or 13 payments I paid the vehicle from $18,000 to $17,100. After a year I was fortunate enough to refinance my loan to 5.9% through my bank and I'm still paying $500 / month without a problem financially.

Problem

Due to having a ridiculously high interest rate early on, I am in a situation where I owe over $15,000 for a car that bluebooks for under $10,000. The vehicle exhibits signs of transmission issues that I fear will be very costly to fix. While I am able to pay the $500/mo for the vehicle, I know for certain I'm engaged in a really bad deal financially.

I'm prepared to take a hit to my credit and even ride a bike to work for the next few months while I save money for a more practical vehicle. I've been thinking of ways to get out of this loan for about a year and, after experiencing some odd behavior from my car this week, am ready to make a move. However, I don't know the best path to take.

My Question

How do I exit / terminate a toxic auto-loan with the least personal damage?

Answer 1

Seems to me you don't have a ton of great choices, but of them:

1. Keep going as you are. If/when the car becomes unusable without significant expenses, stop using it. Buy another junker and use that to get by until your loan is paid off. From now until then, put aside a few hundred (or whatever you can, if more) each month towards the anticipated purchase. When you do buy this junker, pay in cash - no loan. Just get something that will take you to work, and that includes "bike" if that's a possibility. When you can, sell the no longer usable car to finish paying off the loan.

2. Start aggressively paying off the current loan, with the eye of getting it down to where you're not underwater anymore. Then sell the car and dispose of the loan, and buy a better replacement. Scrimp and save and cut everything - eat cheaply (and never out), cut your personal expenses everywhere you can. If you get another $250 a month towards principal, you can probably be no-longer-underwater in about a year.

3. Get a personal loan today for the amount that you're underwater, and immediately sell the car. This gets you out of the loan and car the quickest, and if you think the car will devalue significantly between now and when you might be not underwater anymore, this might be the best option. But it's the most expensive, likely - you'll pay 12% to 20% on the difference. Now, 12% of $5000 is less than 5% of 15000, so it might actually be a good financial deal - but you'll probably have to shop around to get 12-15% with a 660 (though it's probably possible). You'll still be without a car at this point, though, so you'd have to buy another one (or live without for a while), and you'd still have a payment of some sort, but perhaps a more manageable one ($5000 @ 12% @ 5 years means something a bit over $100 a month, for example.)

I recommend that if you can get by without a car for a while, option 2 is your best bet. All of these will require some financial care for a while, and probably cutting back on expenses for a year or two; but realistically, you shouldn't expect anything else. Get a budgeting app if it will help see how to do this.

As far as getting out of the loan without paying it, I don't recommend that at all. Your credit will be ruined for at least seven years, and 660 is not bad at all really, and then would take yet more years to recover. You will likely be sued for the balance plus collection costs, beyond repossession. The consequences would be far, far worse than just paying it off, and I mean that financially as well as ethically.

Answer 2

Pay it off. If necessary, get a loan so you can pay it off; that's what refinancing is all about and your favorite bank or credit union would be happy to help you with this.

If that isn't sufficient to make the car affordable you may need to sell it, take the loss, and learn from the experience.

Sorry, but you made an agreement and it's up to you to find a way to meet your end of the bargain.

(If you had decided you didn't like this loan within a few days of signing, you might have been able to back out under "cooling off period" laws. But those only allow a very limited time for reconsideration.)