Author Topic: Opportunity to escape a bad car purchase....for $4,000  (Read 4933 times)

CoffeeDrinkingThrow

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Opportunity to escape a bad car purchase....for $4,000
« on: July 08, 2015, 07:24:21 PM »
I've been working to sell my too-expensive car for about a month now and think I finally have a serious buyer.

 I paid 38.5k for this thing a few months ago and currently owe 36.5k. I love the car but it's a terrible vehicle for my long drive to work and gets about 22MPG. With insurance and gas I'm spending about $1,200-1,400 a month. I have access to another vehicle I could be using to get to work that only costs me gas and gets 30MPG. This vehicle might go away in the future requiring me to buy a much cheaper used vehicle - but even then I would realize a significant cost savings over the current situation.

That said - the current high offer on this thing is around 32.5k which requires me to pull 4k out of my 401k (after taxes/penalties) in order to cover the difference. It really sucks to lose that much money on nothing...but I'm not sure I'm going to get a better offer as despite my increasing equity over time the milage will also go up quickly.

I think the answer is probably a huge 'yes' and fits with the latest MMM post...but I'd like some outside feedback all the same. Thanks!

innkeeper77

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #1 on: July 08, 2015, 08:21:26 PM »
Not to nitpick, but why would you pull money actually out of your 401k? A 401k loan would probably be much better overall, as it would not have penalties... you can also probably get a $4k personal loan from a local bank or credit union with interest under 8% (With good credit, closer to 6% is likely) - if you take that out, then pay the loan of aggressively, it would also probably be better than taking a hit with 401k penalties.....

Forcus

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #2 on: July 08, 2015, 09:45:47 PM »
Yes to selling, no to a 401k withdrawal. It seems like you are on the right path but just to emphasize it, someone who doesn't have $4k in savings doesn't have any business buying a $40k car.

CoffeeDrinkingThrow

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #3 on: July 08, 2015, 10:02:38 PM »
Thanks for the suggestion on the 401k loan and personal loan. I don't think I have the option to take a loan from the 401k (I don't work there any longer) but I could look into doing a personal loan from my bank. I wasn't really open to the idea of taking on more debt but with the 10% penalty and 25% tax withholding I think I'd be losing $1,400 or so doing a straight withdrawal from the 401k.

gooki

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #4 on: July 09, 2015, 03:28:01 AM »
Sell sell sell.

raikoi

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #5 on: July 09, 2015, 04:40:50 AM »
you´re walking the right path! congrats!

CmFtns

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #6 on: July 09, 2015, 06:51:16 AM »
Just wondering... what is the vehicle? How many miles?

And I'm not saying this is the best option but why cant you hold off for a better offer while also not putting more miles on it (drive the other 30mpg car)

If your car loan is less than 6% then it might be better to make large payments on the car to bring the principle to that 32.5k number instead of taking out a loan then sell it... That will also give more time to get a better offer
« Last Edit: July 09, 2015, 06:53:54 AM by comfyfutons »

Dulcimina

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #7 on: July 09, 2015, 07:34:29 AM »
Not to nitpick, but why would you pull money actually out of your 401k? A 401k loan would probably be much better overall, as it would not have penalties... you can also probably get a $4k personal loan from a local bank or credit union with interest under 8% (With good credit, closer to 6% is likely) - if you take that out, then pay the loan of aggressively, it would also probably be better than taking a hit with 401k penalties.....
I was going to suggest a cash advance  then pay it off aggressively, but a personal loan is a much better idea.

Lady Fordragon

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #8 on: July 09, 2015, 09:09:25 AM »
You could also look into getting a loan through Lending Club or a similar site.  Not sure what the interest rate would be for $4k, but it might be lower than going through a bank or credit union.  It would definitely be worth checking out.

James

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #9 on: July 09, 2015, 09:35:17 AM »
A 401k loan is a much better plan than a 401k withdrawal, see if you can do that. Most companies with 401k do allow the loan, you just pay yourself 3.5%, and it is repaid through your paycheck over a time period of your choice. (up to 5 years, though you can pay it back faster without penalty)


If not, then I suggest trying to short sell using other money than cash out of 401k. I definitely agree with the idea of the short sell right away rather than waiting, especially if you have a few offers and don't think the price will go up.

CoffeeDrinkingThrow

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #10 on: July 09, 2015, 10:08:23 PM »
Hi all - thought I'd give a quick update. Car sold today for 33k!

Another idea I'm going to explore tomorrow is taking the withdrawal from my ROTH IRA vs. a 401(k) since I believe I'd be looking at just the 10% penalty as the taxes are already paid on that money. Understand it's still a bad option but if I had access to the cash I wouldn't be looking at any retirement account. Personal loan will also be discussed.

Thanks for the feedback - it was a little emotional getting rid of something I really enjoyed but I know it was the right decision.

Forcus

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #11 on: July 10, 2015, 11:02:01 AM »
Congrats!

Amasa

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #12 on: July 10, 2015, 11:21:53 AM »
Congratulations on selling the car!!

I am on the personal loan side of the discussion. You could look at it like this: With that car gone, you should be saving about $1000/month (I'm assuming gas, etc. on the new car is $200-$400/month, adjust these numbers if that assumption is wrong). If you take out a $3500 loan at 8% interest, you would be able to pay it off in about 4 months. According to this calculator: http://www.calculator.net/loan-calculator.html?cloanamount=3500&cloanterm=0&cloantermmonth=4&cinterestrate=8&ccompound=monthly&cpayback=month this means that taking out the loan should cost you less than $59, bringing your effective borrowing cost to about 2% of $3500. If you can find another source of $3500 that costs you less than 2%, I would go with that! But it seems like taking a personal loan would be your best option, if you haven't chosen one already.

KCM5

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #13 on: July 10, 2015, 12:55:15 PM »
Hi all - thought I'd give a quick update. Car sold today for 33k!

Another idea I'm going to explore tomorrow is taking the withdrawal from my ROTH IRA vs. a 401(k) since I believe I'd be looking at just the 10% penalty as the taxes are already paid on that money. Understand it's still a bad option but if I had access to the cash I wouldn't be looking at any retirement account. Personal loan will also be discussed.

Thanks for the feedback - it was a little emotional getting rid of something I really enjoyed but I know it was the right decision.

There's never a penalty on withdrawing contributions from a Roth IRA. (contributions only)

MrSal

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #14 on: July 11, 2015, 10:02:43 AM »
why not sign up for a credit card... pay the difference with the credit card and most credit cards give you 12 months or even 24 months of 0% interest.

mandy_2002

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #15 on: July 11, 2015, 10:30:24 AM »
Hi all - thought I'd give a quick update. Car sold today for 33k!

Another idea I'm going to explore tomorrow is taking the withdrawal from my ROTH IRA vs. a 401(k) since I believe I'd be looking at just the 10% penalty as the taxes are already paid on that money. ...

There's never a penalty on withdrawing contributions from a Roth IRA. (contributions only)

This is something that a lot of people don't understand about the Roth IRA's. If you have put 10,000 into a Roth IRA and the current balance is 12,000, you can remove your 10,000 without penalty or fee and leave the 2,000 to grow.

The IRA custodian will send you and the IRS a 1099R, and they will assume it’s taxable. You have to fill out Form 8606 on your next year’s tax return, which will show that it was contributions that you were withdrawing.

Dicey

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #16 on: July 11, 2015, 10:53:56 AM »
There's never a penalty on withdrawing contributions from a Roth IRA. (contributions only)
This is something that a lot of people don't understand about the Roth IRA's. If you have put 10,000 into a Roth IRA and the current balance is 12,000, you can remove your 10,000 without penalty or fee and leave the 2,000 to grow.
Isn't there a time limit on how long the account's been established before one can withdraw the contribution without penalty?

Just asking for clarification. It's a bad idea, IMHO. Plus doing so can complicate future withdrawals, so make sure you do your homework thoroughly and keep great records.

I'd sell stuff/borrow private money/seek CU personal loan/0% CC advance, etc. first.

Also, I see the OP's car has sold, but another interesting new option for buying and selling new cars is beepi.com.

La Bibliotecaria Feroz

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Re: Opportunity to escape a bad car purchase....for $4,000
« Reply #17 on: July 11, 2015, 11:38:44 AM »
If you do take money out of an IRA but put it back within 60 days, you can just pretend it was an aborted rollover, or so I have heard.

Mr. FP is able to borrow against the 403(b) for the company he no longer works for.