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Car's too small, loan's upside down

Keep the car, says The Credit Guy

By Todd Ossenfort

Ask The Credit Guy

The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues. Ask a question.

I have a 2001 Lexus IS 300 and I am really upside down on it. I owe $18,456 and it's not worth even $11,000 and I don't have any money for a down payment to get another car. What are my other options? The only reason I want to get out of it is because I just had a baby seven months ago and there just isn't enough room in the car. Also, I found out I was pregnant one month after I got the car. So please help me.
-- Kiki

Dear Kiki,
Unfortunately, from the little information I have in your letter, it sounds as if your best option at this point may be to keep the Lexus. For you to be so far upside fdown in your loan, you must have a fairly long-term, high interest rate loan. To go out and get another vehicle with no down payment and an equally high interest rate loan, you would be upside down in your next loan very quickly as well.

As you have found, you have very few options when you are upside down in a loan. You can either sell the car for a loss, stop making payments and let the car be repossessed or keep the car and continue to make the payments. I would recommend you keep the car you have now rather than let the car go and do further damage to your credit score. Some people think letting a car go to repo ends their problems. It doesn't. You'll owe additional money when the car is sold at auction by the lender and the sale price does not begin to satisfy the balance on your loan.

I hope the car is running well and you won't have any major expenses for upkeep or maintenance in the near future.  My suggestion is to work toward getting right side up in your loan and then sell the vehicle. First, check with your lender to assure you do not have any terms in your loan that would penalize you for early repayment. Then, make additional payments of whatever amount your budgeft will allow beyond your regular monthly loan payment. Even if you make the same payment biweekly instead of monthly you will pay down the balance at an accelerated rate.

You can use a calculator to determine how long it will take you to pay down the loan amount to where you could sell the car for what remains due on the loan balance. For example, if you paid an additional $100 per month, you may be able to sell your car in as little as two years. If you could save another $50 a month for the two years while you are paying down the loan balance, you could have $1,200 saved for a down payment.

You can do several things to help avoid being upside in your next car loan.

• First, make sure you put enough money down.
• Second, check the value of the car you are purchasing.
• Third, if your credit is less than stellar and you only qualify for a high-interest loan, do what you can to improve your credit rating. Pay off any charged-off accounts, bring past due accounts current and make sure you have any inaccurate information removed from your credit report.
• Fourth, purchase only as much car as you can afford.

Overbuying and extending the loan so you can afford the payments is a mistake many people make when purchasing vehicles that ends us causing them to be upside down in their loans. Being able to have more room -- both in the car and in your bank account -- for you and that new bundle of joy is going to be a lot better than being able to roll down the road in style.

Take care of your credit!

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to The Credit Guy.

Published: February 29, 2008

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