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DEBTSMART®: Pickup Payments
by Scott Bilker
Mr. Bilker,
I really enjoy reading your newsletter and have gotten several good tips from it. My problem is that I have a Dodge pickup (pre-owned) which I owe about $13,000 on, and it is only worth around $9,000. I am about halfway through a five-year loan and am paying $524.00 a month.
I married recently and am having a baby soon, so I need to find a way to either get rid of this pickup or lower the payments. What would you recommend?
Any advice would be appreciated.
Thank you.
Tracy
Tracy,
Thanks for letting me know that you enjoy reading DebtSmart!
Congratulations on your marriage and pregnancy!
You're certainly in a tough position with the truck payments. It's good that you purchased the truck used because the depreciation would be even greater if that weren't the case. Although it's still difficult having that $4,000 difference between the value of the vehicle and the loan amount.
Using my DebtSmart Loan Calculator, and the fact that you have about 2.5 years to go with a $13,000 balance, making monthly payments of $524, I have calculated that the original purchase price is about $22,000 at an interest rate of 15%! Boy that's a huge interest rate and certainly one of the main reasons that there is such a big difference between the value of the truck and the unpaid balance.
Here are a few suggestions; things that I would consider implementing if I were in your situation. That doesn't mean that you should necessarily do these, it's just "what Scott would do":
Refinance the outstanding amount
I would look into finding a low-rate credit card, a rate lower than the current rate on your auto loan, and paying off the truck with that card. The rate I would use is 0% if possible. I have plenty of 0% offers that would cover that cost and you may too. Call your credit card banks to find out if they will give you 6 months, or one year, if you transfer $13,000.
Even a fixed 3.99% would be great and save you bundle of cash! You would also have the option to make minimum payments, which may increase the overall cost of the truck. However, it would reduce your payments. For example, with a 2% minimum payment, your monthly cost would drop to $260 from $524. And, if the rate is 0%, then it costs you nothing to do this!
Sell the truck
Get rid of the truck and eat the $4,000. You could then pay off that $4,000 with a low-rate card and reduce that cost to say $80 per month. The downside is that you will probably still need a car. If that's the case, then you should hold on to the truck.
Trade in the truck
Get another car (used) that's less expensive and roll that $4,000 loss into the next vehicle. Although this is an option, you have to do the math carefully to make sure that it works in your favor. Finding a quality vehicle is also important. The toughest part here is going to be negotiating with a dealer, making this my least favorite option. However, I do mention it for completeness.
Personally, refinancing the outstanding amount with a credit card is what I would do to reduce that cost. I would want to hang on to the truck because I know its condition and wouldn't want to risk having to add the cost of fixing an unknown vehicle.
Hope that helps!
Regards,
Scott
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