Advice for a Reader with a Really Bad Car Loan

I received this email yesterday:


I am recently divorced and I recently filed bankruptcy and discharged. I needed transportation so I had to take what I could get under my circumstances. This is what I got which is not too good, but I needed something.

Loan $23,108.93
APR 19.50%
72 months
Payment $546.84 which will make my total of payments $39,372.48

Should I double (or more) up on payments and try to get this paid off sooner?
Should I make my payments for awhile (2 years) to build up my credit and then try to get a better loan?
Should I put the extra money into some type of account to draw interest?
I need help, what would you recommend?

Thank you in advance for your help,


There’s no way around it…a 19.5% interest rate on a car loan is crazy! If you kept the loan for the entire 72 months, you would be paying over $16,000 in interest! That’s roughly 70% of the price of the car. In other words, that’s almost like paying for 2 cars.

What’s done is done but I think I would have looked for a cheaper car.

Okay, now to answer your questions…

Should I double (or more) up on payments and try to get this paid off sooner?

I ran an amortization and found out that if you doubled your payments and payed $1,092.85 per month, you could have the car paid off in 27 months (26 payments of 1,092.85 and one payment of $128.05). This would bring your total interest payed to a much-easier-to-stomach amount of $5,435.23. It’s still a lot considering you are paying nearly $1,100 per month. Doubling up on your payments isn’t a bad idea if you can afford to.

Should I make my payments for awhile (2 years) to build up my credit and then try to get a better loan?

The problem I see with this strategy is that at the end of two years, you’d still owe over $18,000 on the car. It would be hard to find a loan with decent terms for a two-year old car that has depreciated 30 to 40%.

Should I put the extra money into some type of account to draw interest?

I do think you need an emergency fund of some sort…say $1,000 to $2,0000. Beyond that, it simply makes no sense to have extra cash sitting in a bank account drawing pennies in interest while you’re paying off a 19.5% loan.

So, here’s what I would do:

1. Put back a little money for a bare-bones emergency fund.

2. Pay as much as you can on the car loan to get rid of that debt. Just make sure that there’s no pre-payment penalty and make sure your lenders applies the extra payment to the principal on the loan.

3. After the loan is paid off promise yourself to never get involved that kind of loan again.

4. If you didn’t miss that payment, then put it towards your retirement once the car is paid off.

28 thoughts on “Advice for a Reader with a Really Bad Car Loan”

  1. D –

    I was in a comparable situation many years ago, although not to the extent that you’re experiencing currently. I, like you, needed a car and didn’t have the best financial circumstances. Definitely double up on your payments (like JLP suggests) to eliminate the debt as quickly as possible.

    Side Note: When I went through this, I worked a second job (part time) and put 100% of that income towards my car payment…just a suggestion.

  2. How about don’t buy a car that necessitates a loan of $23,000? If you truly need a car for transportation and cannot afford one, then borrow as little as possible. I cannot believe that anyone couldn’t find a reasonable and reliable car for a price that’s around a third what he’s considering borrowing.

  3. How do you read a personal finance blog and then go and take out a $23,000 loan? He got himself into some deep doodoo.

    JLP, your advice is great. Good job!

    I don’t have anything to add in the way of advice (JLP covered it very well) but I would like to ask others how they feel when they hear this. I find my first reaction is shock, then mixed feelings of sympathy, anger, and pity.

    What do you feel when you read stories like this?

  4. I was in same exact situation.

    First try fixing up your credit before doing anything, look at your report, fix as much as you can.

    Then find a Credit Union that you can become a member of and get a loan from them. Credit Union’s rate will be around 5% for used car. You will have enough equity in your car that even without excellent credit you will obtain a loan.

    Keep us posted!

  5. At some point the dude has to stop making bad decisions. Buy a vehicle for $23k following a divorce/bankruptcy! Are you kidding me? What’s next…..a time share?

    Seems like another bankruptcy is down the road.

    Sorry for being harsh. Good luck.

  6. I don’t think he COULD sell the car. What money could he possibly make off of it? He probably should just try and pay it off ASAP.

  7. I’d probably sell the car at a loss, might costs a few thousand to dump it, but would be a better long turn idea if he truly can’t afford it.

  8. One addition- if he makes extra payments and pays his other bills on time I think there is a good chance he would be able to refinance it in time. I agree with BetaDocuments that joining a credit union is likely the best source for a good car loan. Even though they might say no today, I would still talk with their loan officer. Maybe they can work out a plan- you pay extra $X for Y months and they would be willing consider refinancing your loan? Why not ask, if they say no you are no worse off. If they say yes you have a plan that could save you thousands.

    -Rick Francis

  9. Sell the car immediately. Paying a stupid tax on a couple grand loss is better than paying a stupid tax on $23,000. “I had to take what I could get…”???

    Doesn’t anyone remember anything from Dave Ramsey? Go out and buy a beater until you can afford a $23,000 vehicle.

    Any alternative to selling this car would be considered bad personal finance advice. Sell it now. You can’t recoup sunk costs so don’t chase the bad decision with more.

    Harsh, but this guy’s got to face reality.

  10. Brad,

    The guy is talking about doubling up on his payments so it doeesn’t sound to me like he can’t afford the car from a cash flow position.

    I agree that it was a bad idea to buy the car in the first place. But it’s done. Just because it was a bad idea in the first place doesn’t mean it’s a good idea to get rid of it now.

    Besides, who made Dave Ramsey god of personal finance? Didn’t he lose everything at one time?

  11. The problem is that poor people always have good intentions that rarely work out. The double payment happens one month, then the next month a different poor financial position prevents the payment. Something always comes up. I’ve been there. Dave has been there.

    The harsh reality is that the only way to break the cycle is to live with less than you earn. This car deal will prevent that. Dump the car, cut the losses, and learn something.

    The reason Dave Ramsey is successful is because his lessons work for thousands of people. Being nice and enabling poor financial decisions isn’t the way to go.

  12. I paid a stupid tax when I was younger. I bought an expensive vehicle (financed for who knows how long) — the insurance payments were about the same as the car payment, around $300 a month each.

    I dumped it after 6 months, rolled the loss into a new loan for a much cheaper used vehicle. I’ve had that vehicle for 10 years now (it’s a 1997 model, and been paid off for 6 years) and have always thought that was the best move I’ve ever done.

    I spent maybe $1000 this year in maintenance/repair (replaced the entire braking system practically), and that is _nothing_ compared to a car payment. It’s got 120k miles now, in great shape, and from reading online forums, people are getting upwards of 250k miles on the same model made in the late 80s, as long as it is properly maintained (trans fluid is a big thing people neglect). I suspect it will last me another 10 years.

    The blue-book “retail price” for mine is $3,400. So, yeah, you can spend a little to get a decent reliable vehicle, even if it needs some repairs — you will be much better off financially.

  13. One more thought on my story in #16. When I went to get the brakes worked on (they were in bad shape) and found out that it was going to cost $1,000 to properly fix everything that needed to be done — I had an internal debate with myself to try to justify spending $1,000 on repairs for a vehicle I’d only be able to sell for $1,500, maybe $2,000 (if the brakes were fixed).

    The conclusion I finally reached, was that spending $1,000 in repairs, is about the same amount of money I’d spend in 4 months on a car payment.

    That made the decision an easy one: a paid for-car is worth a lot more than I’d realized, and it was a much better idea to repair what I already own.

  14. I needed reliable transportation at one point and following Dave Ramsey’s advice did not intend to get into a car loan. So I paid CASH for a $1200 car that I drove for 3 years. If I had enough cash to pay double car payments on a $23,000 loan at 19% APR I think I could pay cash pretty quick for a decent car. Maybe borrow an extra car from parents friends, carpool, etc. until I can afford one.

    The flip side is this guys not only throwing away money towards interest the STUPID CAR is going DOWN in value. How is that going to help him in the long run?

    SELL THE CAR! Get a loan (friends, parents, anyone, all the above) for the difference you owe from the sale and get out of it. It’s better to owe $5-10k then $23k, you cut your car debt in half or more and stop the outrageous payments. Then pay cash for a car you can AFFORD with cash.

  15. If he will spend between 5000 and 16000 in interest, then we should use that as a starting point. If he values saving money more than he hates driving beaters, he should cut his losses and follow the ramsey beater plan.
    He should also take into account the possibilities that he would:
    Not being able to pay double and paying closer to 160000.
    Not being able to make payments and getting repo-ed.

    A lot of this turns on the security of his income and lifestyle.

    Debt is risky and you feel like a slave. When I see beautiful cars driving around, I think of the monthly payments and lack of equity, it makes me feel a little sick.

  16. Ouch! Just hearing that interest rate is painful. We, as a county, need to change our mindset. With the monthly payment being made on that car he could have easily had enough money to buy a cash car in a month or two, thus avoiding interest. The cash car may not have been pretty, but having to have a car doesn’t mean you have to have an expensive one.

  17. Wow. I think I would have bought a good used car, at a much cheaper price.

    I think the reader’s move to double the payments to pay it off quickly might be good for his/her credit score!

    The key is to focus on paying the car payment, and not to run up other credit debt again. While I’m not a huge fan of budgets, this reader should really consider using one.

  18. I was in a similar situation when I graduated college. High cost of living prohibited me from getting my own place near work so I had to commute 150+ roundtrip from my parents house. I needed a reliable car for lots of miles that wouldn’t break down. I realize used cars can provide that kind of service, but there’s still more risk of missed days from a disabled vehicle than there is with a brand new car – and missed days generally mean no pay. My experience with “Cash Cars” has generally shown reliability is an issue.

    I went as basic as I could get, but had to finance through Ford at a ridiculous interest rate. Out the door, the loan was about 23K @ about 20% – a lot like this situation. I would have had to give up student/family rebates, etc to finance through my CU and would have financed about 25K. Doing the math, it would have cost more financing initially through the CU rather than doing 6 mos. w/ Ford then doing a refi.

    I lived on Ramen and water and worked as much OT as I could get for the next six months. My payment was about $500+/mo and I tried to hit the $600 mark. Six months later, when my contract w/ Ford was up, I refinanced ~ 20K with my CU at ~5%…I was able to lower my payments and shorten my term all in one shot.

    Four years later, I’m a few months out from paying it off and it has worked out. I don’t think this gentleman made a bad decision – for me, slim pickings in the job market meant a longer commute, etc. You make do however you can and if that means having to stretch your budget a bit so you can keep your job…then you work with it. If he needed the car, then he needed the car.

  19. “I needed transportation so I had to take what I could get under my circumstances”
    Wow.. Even among the new cars, there are cheaper cars than 23K. Good ones too, like a Civic. I am not even talking about used cars that are much much cheaper.

    Whatever. I’d tend to agree with JLP’s advice – pay off the loan as fast as you can. In terms of selling it and buying a cheaper car, I’d just sit down and tried to do some math: how soon he can repay the loan, what it would cost him, what kind of used car he could get, etc. Keep in mind that it’s not clear if he would clear much money at all were he to sell the car; for all we know he could be upside down. It is quite possible that were he to sell the car he’d be at 0 or below and with no car.

    @BG – I did exactly the opposite when I was young and came to an opposite conclusion. My very first car was a used one. This was 1983, and as I got my MS/CS, my parents bought me a car. I was a new driver as I had had no car in grad school and a terrible one at that. Combine this with the fact that my parents weren’t exactly rich having come from the USSR only 5 years before that, this was the only choice. And a pretty good present too. The car was a 1978 Cutlas Calais (if I remember correctly, I could be off by a few years), and it was worth $4300. I totalled it after about 4 years – my fault entirely. But… After I totalled it, I did some math. While I owned it, I had to replace alternator, distributor, transmission, exhaust pipes and muffler and I don’t even remember what else. When I divided the total amount of money I spent in 4 years that I had this car, I got more every months than payments on a new smaller car would’ve been. So my new car was a Camry; I got it for around $12600, paid about half in cash and financed the other half. Don’t remember how much the payments were. The interest was deductible at the time too. In a couple of years (don’t remember) I simply looked at the loan, determined it was costing me way too much money, and sent the credit union the check for the full remaining balance. Whatever it was. Since then I am buying new, though now I am able to pay cash. Not that I wouldn’t consider a loan if I ever see the interest rate below CD rates.

    I have to say, though, that so far none of new cars I bought were over 20K. This 87 Camry I drove until 1995. During this time there was a period I commuted 46 miles one way, so by that time my mileage got over 100K and I started to get nervous. I sold it for about $3700, and bought a new (95) Corolla for cash (between 14K-15K out the door). In 2003 my parents old car broke down, so I gave them mine – they still drive it. It didn’t have that many miles as I no longer commuted. Instead, I bought 2003 Corolla for around 17K (out the door). This one I totalled in 2006; got check for over 13K from the insurance company; added a little money and bought a new Civic – I think a little over 18K in total. I don’t remember the exact numbers.

    At any rate, I only look at new cars nowadays. However, unlike this guy I can afford them.

    Regardless, people make mistakes, especially young people. But he just really needs to do some math and figure out whether it makes more sense for him to sell and buy a used car or keep this one, but he should pay off this loan ASAP. I’d imagine most of us here would love 18% return on our money.

  20. #34) I think the problem was you kept totaling the cars, before you could capture a lot of the value you would get from having a paid-off car for a long period of time.

    That transmission job (although expensive) would’ve gotten you another 100k miles easily I bet, for the $2k is probably cost — that’s cheap in the big scheme of things.

  21. If he can manage double payments then I think paying it off fast would be a good plan. With a 4 year loan he’d have it paid off in 2 years or less. Then he’s got an almost new car paid off. If he can refinance then I’d certainly do so, but it doesn’t seem likely he’d get a good rate anytime soon with a recent bankruptcy.

    If he sells the car now then he’ll take a huge hit on the depreciation. Might as well hang on to it and eat the interest for a year or two.

    I’m working with the assumption that they have a pretty good income. If the car payments are more than 10% of their income then sell it, take the loss and buy a more practical priced car.

    In any case they need to work on their personal finance. Running out and buying a new car with high interest right after bankruptcy is not a good first step. They should be loooking to reduce their expenses and stop keeping up with the jonses.

  22. Sound advice on different options. However, whenever someone is going to borrow fund for any purpose, one must always think of the interest burden and how much of monthly payment can be afforded. Otherwise, it is going to bring trouble like this.

  23. @BG – I don’t think 2 totalled car in the period since 1983 with no accidents in between counts as “keep totalling the cars”. But it is possible, I’d have gotten more value of this old Olds, so point taken.

    Whatever, I did get more money from the insurer for this car that what I could’ve gotten on the open market, so maybe if I subtracted that it wouldn’t have been a bad deal. Regardless, there is something about being sure your car will start in the morning and will get you from point A to point B.

    I do believe one should buy what one should afford, and this guy’s purchase was not the smartest financial decision. However, now that he has the car, he has to think about what is best for him financially and it may well be that paying off the loan as quickly as possible and then driving this car until it breaks is the best option.

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