Need sound advice on car ownership / debt issue

[JuicyCrab]

Hey guys,

First post so please be kind! :)

I'm having a slight dilemma working out how to tackle my car debt.

Summary of situation:

Purchased the car at $28,000, fully financed on a 7 year loan at 8.95% (yes stupid I know, young and excited uni graduate...)

3.5 years later I find MMM, car is now valued at $20,000 and I've started attacking the loan aggressively. December 2015: loan is $18,000 owing, now: $13,000 owing (so yes I've attacked it quite aggressively with cost cutting and selling off useless assets).

I've made the decision to pay the loan down to $10,000 , sell the car at its current market value ($20,000) and purchase a $10,000 car. Debt gone, happy days.

The small issue is I have JUST dropped $2,000 into a major service on the car, and selling it now I feel that the $2,000 in value I have just put into the car (plus knowing its mechanically sound, plus the emotional attachment of the $2,000 'investment') is going to be lost and I'm having a hard time swallowing that. Should I cut my losses and sell, or factor this cost in and hold the car for a more extended period of time while paying off the debt?

Can anyone offer some sound advice / mindset approach to this that might help put some clarity over it?

Cheers
James
Perth, Australia

[ETBen]

No expert here but I would simply look at where you end.

If you sell (and are you sure you'll be getting that much??), you will be buying a cheaper car, no financing, right?  So you are now driving with only the costs of gas and maintenance.

If you keep it to somehow mentally justify the money you spent in the past, or somehow feel like you're making the past spending work longer for you, then you are still spending the monthly car payment amount each month. Plus gas and maintenance. And the car continues to depreciate and will make less when you sell. So you spend more, to maybe feel better about pay choices, to lose more money.

[MsPeacock]

I just sold a very overly expensive "clown car" and used the equity towards a paid off car. Even though I didn't love the expensive car, it was a bit of an emotional struggle to let it go. But, you know, once I drove off in the paid off car I just felt a huge weight lift from my shoulders. And I am so happy not to have a car payment!

It sounds like you fully understand the financial implications of continuing to make very expensive car payments on an astoundingly high interest car loan. The money on repairs and past payments is gone. Do not throw more money into paying down the loan. It makes more sense to bank extra money, sell the car as soon as possible, and use the equity towards a new car. You had to spend the $2000 on repairs because without it you wouldn't be able to sell the car. The return on investment on continued car payments and repairs is extremely poor. This is about future spending (more car payments) not past spending. Looking forward it makes no sense to continue to own this car.

[JuicyCrab]

Thanks for the reply guys :). In my gut I guess I already knew the answer to this, just needed a little encouragement from like minded and smart people on the matters of personal finance (unfortunately, I am surrounded by people who don't follow MMM mindsets in life, makes these decisions very hard when you are not supported!).

The car is going, along with the debt.

Thanks guys!

[nereo]

JuicyCrab - glad to see that you see this car for what it is; a ridiculous luxury that you simply cannot afford at the present time.

Regarding the $2000 you just paid for servicing:  This is a "sunk cost" and going forward it should not influence your decision about when to sell at all.  The emotional response is frequently "oh, but I want to get my money's worth out of that repair..." but the reality is that every additional week you keep the car you loose more money on the loan and on depreciation. 

A similar situation exists when people say "Oh, I can't/won't sell the car until I've paid down the loan enough where I'll get back more than I owe: I don't want to have a monthly payment on a car I no longer even own!"  Reading your post I think you may have made the same emotional decision.  Given that you are paying a very high interest rate on the loan and that the car is continuously depreciating in value the correct time to sell is immediately.  The only wiggle-room is if you absolutely need a car for work and selling a clown-car means you won't have the financial ability to buy a used car (any used car).  This would be referred to as a 'debt-trap' - you are getting financially screwed by keeping it but you are too poor to sell it.

[Abel]

I was in a similar position, owing about $10,000 on a pickup I owned until last fall. I had all of the rationalizations in the world. I needed it (very rarely) for work! It helped me carry all of my (far more than I needed to own and carry at once) stuff! I could help friends move (things that rarely required a pickup truck)! Emotional attachment was also high - I bought it largely as a rebound from a life of very cheap and unreliable $1000-$2500 vehicles that got me through high school and college and a bit beyond. And don't get me wrong, it was a fantastic vehicle. Purchased it new with nice options, good mpg (for a gaz guzzling clown truck), and felt like a badass driving it. It had been through about three hours of legitimate 4x4 use in its three year life with me.

It felt so. freaking. good. to take the plunge and sell it and downsize into an older, used higher-mileage hatchback. This was the final stroke to get me debt-free. I found that working the thrift muscles in ways big and small strengthens them and makes other positive steps easier and more pleasant. I have a more fuel-efficient car that I am driving *less* because I look at it in the carport and remember why I got it in the first place...and I go hop on my bicycle instead when I need to run an errand or visit friends a couple miles away. Cheers!

[tobitonic]

Not sure what the car is, but if it needs 2k worth of maintenance more than once every few years, it's not a car I'd keep. It sounds like a luxury vehicle, and unless it's a Lexus / Acura, it'll come with a perpetual luxury maintenance tax. Get rid of it for something reliable.

[DebtFreeBy25]

Thanks for the reply guys :). In my gut I guess I already knew the answer to this, just needed a little encouragement from like minded and smart people on the matters of personal finance (unfortunately, I am surrounded by people who don't follow MMM mindsets in life, makes these decisions very hard when you are not supported!).

The car is going, along with the debt.

Thanks guys!

Congrats! It's always hard to admit that you made a mistake, cut your loses and move on. I believe that when you look back on this decision in a few years you'll be glad you got out of the car loan. Living debt free is everything that we anti-debt evangelists say it is and more. It really is the most freeing feeling.