New car?

You should stay in this car until the wheels fall off. If you have negative equity, you're rolling that forward to the next car, which quickly depreciates and you are even more "upside down."

Get it repaired and don't even think of trading it. When I get rid of most of my cars (by junking them or giving them to charity), they have at least 200K miles on them. In the time I've had them paid off, I can save enough for a good down payment (or maybe even enough to pay cash) for a new car.

When your car is paid, keep making the $289 "payment" to yourself (into a good money market account or something liquid with decent interest) and you won't get back in this situation again.

 

The above is sound advice. However, most people won't listen to it because they want something else.

Don't be one of those people.

 

have you looked into just refinancing your current car?
If you can come up with $3K for a new car, that would surely help with a refinance situation. There are a lot of numbers missing so it's hard to provide advice from a distance. But if you're coming up with $3K for a down payment, all you're really doing is paying off the negative equity and getting 100% financing on the new car. That will quickly turn into negative equity and you'll back where you started, granted in a new car with a higher insurance premium and owing someone for the down payment that you had to borrow.

You're in a delicate situation: if you need to borrow money to borrow money, that's not a good sign. In fact, it's usually the beginning of the end.

 

Be careful before you pay any car loan down faster. Most, especially the subprime loans, have interest calculated by what is called the rule of 78. This means that the interest is severely front-loaded, and you actually save very little by paying it off early. In fact, you'll pay almost the same amount as if you pay out the payments, but you're paying it all now. You lose the use of your money that way.

You'd be better off to keep paying on this loan, take the extra money you save on your insurance, and invest it or put it in a money-market account. That way, you'll have some money when you need it, to pay for repairs or when you're ready for a new car.

 

The rule of 78 is based on the way the interest is structured. I'll give you a one-year example, since that is where the 78 came from, but the same principle is used, the numbers just get larger.

You take the number of months that the loan will be repaid. Let's use 12 for this example. You add that number and all the numbers below it. For our example, it is 12+11+10+9+8+7+6+5+4+3+2+1, which equals 78.

First, the interest is computed for the entire loan. Say 10% a year on $7,800, which would be $780. If the loan is for longer than a year, you'd be figuring the amount for all years. It isn't simple interest on the unpaid balance.

Each month, you pay interest equal to the fraction that has the number of months remaining divided by the total that you computed above. In this example, in the first month you would pay 12/78ths of the interest. In this case, 1/78=$10. So the first month you would pay 12/78, or $120. The next month there are 11 months left on the term of the loan, so you pay 11/78, or $110. The third month you have 10 more months, so you pay 10/78, or $100. You are now three months into a 12-month loan, and you have paid 33/78, almost half the interest!!

The next three months would be 9/78, 8/78, and 7/78. So, when you've paid off half the loan in time, you've already paid more than half the interest.

So you pay the loan off a few months early, expecting to save interest, only to find out that most of the interest has already been paid, and you only save a few dollars. At this point, you are mostly paying principal, and paying early won't save you much. If you took the money and put it somewhere earning 4-5% interest, you would come out ahead.

When you have loans for 3,4, or 5 years, the prepayment is even more front-loaded. For a 5-year (60-month) loan, you pay more than 1/30th of the interest the first month, instead of the 1/60th you'd pay if you divided it evenly.

Most credit unions and, now, some other finance companies compute what is called simple interest on the unpaid balance. That means that the interest rate is divided into monthly amounts, and each month that rate is applied to whatever balance is left. In these cases, paying even a little extra up front will save a lot in the long run because you lower the balance on which the interest is computed.

Almost all subprime loans use the Rule of 78 to compute interest.

 

Lot's of great advice here, I'll add a few things. I may not know too much about credit repair (still learning) but I've been in the car biz for 10 years as salesman, manager, and most importantly for you, finance manager. Here are a few points to consider (I've simplified most of the concepts and examples here so no flaming please about how it "really works").

Your 2-3k negative equity means you're that much "upside down". Always a bad situation. If a dealership says they will "work with you" it means they will work for themselves. Here's what I mean: if you want to buy a 25k car but are upside down 3k they have to ask their banks for a loan of 28k. Ain't gonna happen. Most banks only approve 105-110% of book (they'll grant this extra money so you can spend it on cool things like running boards, extended warranties, etc). Now, if there is a rebate available (say 3k for argument's sake), the dealership can help you by asking for and getting 25k. Now, in essence, 22k of that covers the car and the extra 3k covers your loan.

You said if you keep it much longer it won't make sense to trade it (because of the mileage). Why not? Right now on a trade you're losing money. If you wait until you're "unburied" then you can get something from a dealer or sell privately. Even if you don't "make" anything on the trade/sale, the fact that it will be a wash at some point in the future is better than being 2-3k upside-down. Trust me, the depreciation you are puttin on because of excess mileage has less of a financial impact then your current 17%. It will take a while but on a month-to-month basis your negative equity will go down. Start today by calling for a "payoff" from your bank. Then go to the NADA web site and get a fair market value (FMV) for your car on a PRIVATE SALE (not a trade it). Write down that number. Repeat in 30 days and every month going forward. You'll see that you're slowly but surely unburying yourself.

We take people, like you, who are buried all day long, tell them we can help and then bury them deeper. Example, let's say there is no trade involved. A new car driven off the lot usually is 2-5k upside-down. That means your "payoff" which you can call the bank to get from an automated system is 2-5k higher than what the car is worth. As soon as you drive away, two factors jump in the trunk of that car: interest and depreciation. Even worse, since you factored in a negative trade you would be 5-8k upside down. DON'T DO IT!

The reason the dealership wants you to show money down is so that they can make the numbers work. Using my numbers above, you'd be asking for a 28k loan on a 25k car. Bank won't do it. Factor in the rebate (using my 3k example) and you're asking for a 25k loan on a 25k car. Bank still won't do it. Unless you have stellar credit (which you admitted you don't) no bank will give you 0 down. But if you got 3k down, now you're only asking for 22k from the bank for a 25k car. Now they can work with you. The bank won't know until they get a closed contract how much is rebate, how much is cap cost reduction, etc. They're just approving a dollar amount based on credit. So a smart finance manager will make it look like you're buying the car for 25 and asking for 22. Let's say the bank approves. Now your dp goes to the dealership and the rebate (which you sign at closing to assign to them) goes to the dealership. They take that 6k, pay off your 3k and that's that. Plus:

1) they probably high-balled you on the trade value. In reality you'll get less than they at first promised so afterwards it goes on their lot where they can now sell it and make a few more thousand for them.
2) Since you're credit is shaky, they probably got you a subprime loan or at the very least made a few points on your loan and they will make a few extra hundred or thousand. To clarify this: Joe Citizen buys a car once every 3 years and goes to his bank to get a loan. They give him a fair rate. Bob's dealership, on the other hand, closes 100 loans PER MONTH for the banks. They reward them by giving them lower discounted rates which he is legally entitled to add points to as dealership profit. So if Joe goes to his bank he might get 7% these days. If Joe goes to a dealership he might get 7% but the dealership "bought" the loan for 5.5% and passed it on to him (they are making a point and a half). More likely they will try to max out the points the bank allows and give you 9.5%. Then, if he hems and haws and says his bank offered him 7% they will pretend to get on the phone and tell you the bank can go as low as 7.9%. "Not bad," he thinks. After all, the car is out there nice and shiny and waiting to roll. I don't want to go to the bank tomorrow and have to wait a few days. So the dealership just made their 1.5% markup + a .9% ignorance bonus. 2.4% on a 25k loan ain't bad for five minutes work.

As for your family cosigning. It usually creates a problem. Not only missed or late payments which impact their credit but what if they want to get a car next year. "I'm sorry, Mrs. customer, it seems you already have a 25k loan here."

"No, that's my brother's."

Doesn't matter. Then they will have to fight.

Plus, if your credit is that bad, a dealership will probably have to make them the primary and you the secondary. Even worse, many dealerships will use them as a "straw". We--I mean, they, paper the whole deal under the cosigner and by the time you come in to close, you want it so bad that you beg and they eventually give in. So it doesn't help you and it will likely hurt them. Sorry. There is no way you'll get a "prime" rate as you put it as long as you're on the paper.

My advice:

KEEP THE CAR.

If you're at 17% refinance. If you've paid on time (or even not) another bank is happy to pay you off and give you a lower rate, thereby depriving the first bank of your hard-earned dollars and making them for themselves. My brother got 19% on his truck. Refinanced four months later at 12%.

Don't trade. Ever. Especially if you're upside-down. It can only hurt you. After a year or so more, your payoff will equal the car's NADA value so if you sell then (or trade even though I said not to) it's a wash. Why put interest on top of interest?

If breakdown is an issue, get an extended warranty but not from the dealership. WarrantyDirect.com is the most reputable extended warranty company out there. Their parent company sells through dealerships and makes lots of money. But the warrantydirect d/b/a side of the business sells to smart consumers online. You get low prices without the dealership markup. They've had the longest track record and they have the cleanest BBB report (2 or 3 marks in 2 years I think, their nearest competitor has 200). If you have car trouble, you bring your car to the dealership, hand them your warrantydirect card and they pay everything except the deductilbe (unless you choose a $0 deductible).

Hang on to your car and work on your credit in the mean time. By the time your payoff and NADA value are a wash, you can unload that one and get into a new one without having to worry about bothering your family.

One last thing, windshield chips are usually covered by insurance w/o having to pay a deductible.

Hope this helps.

- Alex

 

Big Al-
GREAT break down of how dealerships work! I'm sure we can all learn a thing or two from your well thought out description.
JD937-
Part of a person's- who has bad credit- mind set, is that they always need something new, something bigger, something better, MORE credit, and MORE debt.
DONT LET YOURSELF fall into this DEBT hole! Be happy with what you have now. Pay your credit cards and loans off. REPAIR your credit, and most importantly- QUIT spending money.
In order for you to completely repair your credit, you need to completely repair your lifestyle. TRUST ME- it feels good!
There's a great website that I use called www.mytotalmoneymakeover.com, they charge you $10 bucks a month- but I think it's worth it.
Dave Ramsey created it, you may have heard of him- he is a financial geru.
Hope this helps also!

 

BTW- you may be wondering what I drive....
a 1999 dodge dakota with 172,000 miles on it....and it drives like a champ!
Just some food for thought

 

Let's start at the top. Give me the year, make, model, condition of your car and let me know what (if any) residualizing add-ons you have (like a Bose stereo or a spoiler). I'll also need your payoff from the bank as of TODAY. Not the one you called for a month ago.