Dave Says: Should We Sell Our New Car?

Dear Dave,

We recently bought a new car, and the payments are $336 a month over four and one-half years. We still owe about $12,000 on this vehicle. We bought the car before we started listening to you, but we’ve cleaned up our other debts to the car is the only one hanging over our heads. We’ve also managed to put $10,000 in savings. Would you sell the car, pay it off early or what?
Alicia

Dear Alicia,

You’ve decided car payments are stupid, so congratulations on that! It’s virtually impossible to build wealth with things like car payments hanging around your neck.

My rule of thumb is when you’re serious about getting out of debt, sell anything you can’t pay off in 18 months or less. Since you owe $12,000 on the car, it would mean cutting a check for about $700 a month to pay it off in that amount of time. If you can afford it, that’s one way.

You could also sell the car, but don’t go to a dealer for this. They’ll want to give you the wholesale price for it so they can sell it later and make money. This means you’ll walk away with a lot less in your pocket, and probably not enough to pay off the debt.

If you can’t manage $700 a month, I’d sell it retail. Lots of times that’s as easy as putting a sign in the windshield or taking out an ad in the local newspaper or shopper. Once you get the car sold, pay it off quickly, then use $3,000 - $4,000 from your savings to buy a dependable, used car. You’ll be out of debt, plus you’ll still have the bulk of your savings in place and the available income to refuel that savings account in a hurry.

- Dave