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♪ Got to sort of tell 'em ♪ Two destinations, one loyalty card. Visit yamava.com/palms to discover more. Today on Radical Personal Finance, we tackle a problem that affects about 50% of new car buyers after a while, which is this. What do you do when you're upside down on your car loan and you're trying to escape for whatever reason?

You owe more money on the car than it's worth. How do you get out of that situation? Do my best today to give you a few helpful ideas. ♪ Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets and I'm your host. Thank you for being with me today.

I'll do my best to give you a few helpful ideas, but frankly, I need your help. I have struggled for several days to get this episode to you. This is the umpteenth time I've sat down and hit record, but I'm determined. Like it or not, good or bad, record is on, and I ain't stopping.

♪ Sometimes it's easy for me to create content. I just sit down, hit record, and go. And sometimes I struggle, and this is one of those questions that for whatever reason I've struggled with. I wanted to answer this on Friday. Here it is on Tuesday afternoon at 3.30, and I'm finally like re-recording, and I'm determined by 5 o'clock this thing is going out one way or the other, even if I just get to the middle of it and say, "Guys, I'm sorry.

This was my best shot, and it stinks." That's what's going to happen because I've worked and worked on the question. The question is not that complex, but for me coming up with a useful answer, that is what has been complex. I've tried to come up with a framework. I've tried to come up with reasons.

I've tried to come up with options. I'm going to share those with you today, but this question is tough. It's tough. And so one way or the other, this show is shipping today, and I really do honestly solicit your feedback, not on the show. You can judge if it's good or bad, whatever.

I do solicit your feedback on the ideas for this listener, though, and if you've got some radical ideas, I want to hear them. Here's the question first, though. It comes in from Travis. "Joshua, I know you get a lot of questions, but I was wondering if you have a radical way to get out of an upside-down car loan.

I do financial coaching for people in our church who have requested benevolence, and most of them have large car payments. For example, somebody owes $25,000 on a car worth $15,000. I cannot find a solution that is good, and maybe there is none. Dave Ramsey says borrow the difference so you have a smaller loan, but by the time someone is requesting benevolence, they cannot qualify for borrowing anymore.

Other ideas of rolling it into another car loan with incentives aren't great either. It's really the $3,000 in negative equity and up that I'm looking to solve for. So have any radical ideas? Thanks, Travis." Travis, I don't know. I'm going to try. And I think I've got a few ideas.

I'm going to try. But more than anything, we're to crowdsource this, and I want to hear some great ideas. Before I get to my answer for you, quickly talk about sponsors for today. Sponsor number one is Trade King. Trade King is the official brokerage sponsor of Radical Personal Finance.

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This is the time in January of a new year is a great time to follow through and perfect your budgeting system. Get your data for 2016 at RadicalPersonalFinance.com/YNAB. I mentioned in the beginning that this issue affects about 50% of all new car buyers. Here's the data. About two-thirds of new car buyers actually trade in a vehicle when they buy a new car.

So about two-thirds trade in a vehicle, and about two-thirds of those who trade in a vehicle are already upside down on that vehicle. So about 50% of all new car buyers are upside down when they leave the lot, just according to the research I did in preparing for this question.

That's the data. I found that pretty shocking. I knew it was bad, but I didn't know it was that bad. So remember that the next time a buddy pulls up in a shiny new car, shiny new truck. Remember that just because they're driving a shiny new car and a shiny new truck doesn't mean they're not broke.

But this is a tough situation because what happens is if somebody's trying to get out of it, they've got to do a few things. They've got to, number one, sell the car that they have, come up with more money than the car to pay off the loan, and buy another car.

And it's a massive trap. For example, in the situation that Travis asked about, here's the situation as it exists. This person, if they wanted to escape from the situation, they're going to sell the car for $15,000. Then they've got to come up with another $10,000 out of pocket in order to pay off the lien against the car so that they can release the title to the buyer.

And they've got to come up with the money to buy another car, which is tough. It's a really, really difficult situation. And it dogs people's heels like you wouldn't believe. It's really, really tough. And what makes it even worse, worse, worse is often when people are in this situation, they don't have a lot of capital.

And when you don't have a lot of capital, it's hard to make good decisions. For example, do you sell the car before getting a new one? Or do you try to do a simultaneous selling? What do you drive? If you don't have money to be able to go out and buy a car first and then be able to sell your car, that's tough.

When you're selling a car that has a lien on it, it's not from a dealer, you, in addition to facing the normal things of trying to sell the car quickly, which means you might not get as much money for it, you might face things like the market is just tougher.

People have a tough time on a $15,000 car. That's a tough type of car to sell on the used market because most people aren't buying cars with cash. You can sell a $2,000 car for cash pretty quickly, but a $15,000, $20,000 car with cash, many people aren't there. They need to finance those cars.

So your market is smaller. The people who are dealing in that market and who are paying cash for $15,000 cars, they're expecting a deal. There's going to be a little bit of uncertainty about the title. For example, you might have a lien on it from a divorce or a lien on it from child support payments that are in arrears.

So they got to make sure it's a clear title so there's some risk in it with them. And then they run the question of why is this person selling the car? And every answer you give is bad. It maybe is not treating them well, so they're going to beat you up on the price if you're trying to sell the car.

Or you're just in financial difficulty. Well, they're going to beat you up in price because they find out you're in financial difficulty and they want to get a deal. So it's hard to find a worse situation than this and it's hard to know what to do. It really is tough.

So, Travis, hopefully I beat home. I agree with you. This is difficult. Well, what are your options here? I think of them as basically five options. Option number one is you can roll the negative equity from the existing car into a new loan on a new car and be in the situation that you're in right now except with a fancier car, a newer car.

Number two, you could try to do the thing that you mentioned with the incentives. Buy a new car with an incentive amount high enough to cover the difference in full or in part. Problems there, but there are problems in all of these. Number three is you can try to pay down the loan until you can sell the car.

Number four is you can refinance – which we'll go through all the problems in a second. You can refinance the loan somehow so that you can sell it or you can keep the car and frankly, that's probably often the best solution. It probably is. Now, I think it's important to carefully identify the reason for selling the car and I think this will guide the appropriate decision.

Is your reason for selling the car that you're just trying to get out of debt? That can be good but sometimes people are just like, "I just want to get rid of the car and get rid of $10,000 debt as quickly as I can." Well, sometimes you might need to slow down.

Is the reason to get rid of the car and sell it to lower payments and improve cash flow? Somebody's stuck and there's just not enough room to make traction. They got to figure out how do I free up cash flow. Is the reason to sell the car because the car is no longer appropriate to the family?

Maybe somebody had two kids driving a little car and then found out they were pregnant with twins and now they no longer fit in a five-seat car, something like that. So they need something bigger and they're kind of got their hand forced because the hospital is not going to release the kids unless they're strapped in a car seat and they can't fit the kids.

Is the reason for selling the car to stop losing so much money in depreciation? Maybe somebody woke up to the fact that if they're not making at least $150,000 a year, they shouldn't be driving a $15,000 car if they care to be wealthy. All of those reasons will influence obviously what the appropriate option to pursue is.

Before I go through the options, I urge you, search out the detailed careful facts of the particular situation. For example, one thing that in my mind makes a huge difference here is interest rates. It's one thing to owe $25,000 on a $15,000 car when it was financed through the Honda 000 event and it's at 0% interest rate because the person had good credit when they got it.

Well, in that situation, it's cheap debt and you just got to recognize, hey, this is done. It's a sunk cost. It was stupid, but it's cheap debt. That's very different than someone's paying 21% interest rate because they got ripped off at the local buy here, pay here place. So gather all of the facts.

Now, what to do? Let's walk through those options. Number one, roll the negative equity into a new loan on a new car. I really think this needs to be seriously considered as an option. Not usually what I would recommend, but I think it needs to be seriously considered as an option because I can think of a number of reasons and a number of circumstances in which I think it is very good and wise to buy a brand new car.

The scenario I just illustrated is an example. Let's say that somebody finds themselves pregnant with twins. They've just outgrown their car. They're totally – maybe one of their kids, they're having a difficult pregnancy. Mom is put on bed rest and the reason that they're behind and they're just strapped is because maybe they lost mom's income because she was put on bed rest, didn't have appropriate insurances.

Dad is home taking care of kids and mom. Their finances are in disarray. What do we do? We're stretched. We don't fit in this car. Well, financing on used cars is tough. If the person doesn't have much money and if you can't give them a car, we'll go over that in a while, then maybe their best bet is to go out and try to stem the loss with getting a new car.

And if you can get a new car and drive it for a long period of time, then your problems are improved at least. It's not such a terrible financial situation. If in this example somebody went out and wanted to shop for a brand new minivan, they bought a high-quality minivan.

They were determined, "I'm going to buy it. I'm going to own it from new. It's easiest to finance that way. I'm going to own it from new. It fits my family and we're going to drive it for 20 or 30 years and it's just going to be a long-term thing." Well, then the depreciation is not going to be as big of a deal over a long cycle of ownership as it is in a short cycle of ownership.

The problem with buying new cars comes when you buy a new one every two or three years. Buy a new car and drive it for 20 years, it may work out. And especially in a situation where somebody doesn't have the money to get one that's two or three years old or they can't get favorable terms on refinancing it for two or three years old, then this might be a reasonable solution.

It wouldn't be my go-to, but it would be an option. You would have to shop the market and see what the scenario is, but it could be appropriate to roll the negative equity into a new loan on a new car. The times I would see this being appropriate is if somebody is going to transition to a vehicle they can keep for a long time and that's – otherwise, they should just keep the one that they have now.

If there's some reason why they can't continue driving their current car, that would be appropriate. It doesn't solve the financial. It doesn't solve the cash flow usually, but that would be appropriate if they just have to change to a new vehicle for – a different type of vehicle for something else.

Option two, buy a new car with an incentive amount high enough to cover the difference in full or in part. You see this one tossed around. I don't know how easy it is to actually do. I've never done it and I wouldn't think it was very easy to do and you still have the problem of having a new car.

It should be considered, but sometimes the companies that are throwing out incentive amounts are throwing them out on vehicles that are not selling well and that's what they're – why they're giving so many incentives. One of the unfortunate marks of the lower class is that they buy these cars that just are cheap up front, but then they don't seem to maintain their value.

So their total cycle of ownership is much lower, whereas you find that many times people who are more careful with their shopping will buy a car that's more expensive up front but will retain more residual value. I had a buddy of mine I was talking to recently just bought a Toyota Tacoma.

He bought it new. We were talking through his decision criteria and he said, "I'm shopping the two or three-year-old ones and they're more – I can get a new one for cheaper." In some markets, some countries, some types of cars, that's absolutely the case and you have no incentive to buy the used car in that situation.

Pay down the loan until they can sell. I think that should be seriously considered, but especially as a ratio of numbers. If somebody is $2,000 in the hole, then they're going to be able to make some progress hopefully in the $2,000. That might be an area where with you working to help them with some financial contributions, maybe that can be where you guys kick in $2,000 and they can sell the car and get out.

Now, if they're paying down $10,000 worth of debt on a $15,000 car, that one might not work so well. What you can do is run the numbers and figure out how long is it going to take them to pay down the debt to a reasonable level to catch up with the payments.

So if we assume that a $15,000 car is going to lose 15% of its value in the next year, that's $2,250 in value gone in the next year. If the ultimate goal is to sell the car, well, now we went from paying down $10,000 to paying down $12,000 of debt because the debt is only going to go down at the normal rate.

So we've got a – that one can be tough. Refinancing is really – as Dave Ramsey recommends, refinancing either the difference or refinancing the whole loan, that's really going to be a really good thing to consider. And here, I think your best bet is to look for creative sources of financing.

Look, for example, to the lending websites like Prosper and Lending Club. See if they can do a private market loan with a credit union, something like that. See if they can do a private friends and family loan of some type with favorable terms. Consider refinancing the money onto a credit card.

The way that I would tell them to do that is you can't – is not to go get a credit card and then try to get a cash advance from it because usually that comes at a higher rate. But perhaps the person can – if their credit is such that they could qualify, they could apply for a zero percent introductory rate credit card, put all of their purchases onto the credit card for the first few months.

Put their groceries, their gas, all of the expenses they have onto the credit card so they can get some balance on the credit card. Then all the money they would have been spending out of their checking account, set that aside to be able to pay down the car loan until they can sell it.

And so what you're effectively doing there is refinancing your debt over onto a credit card, which might be more accessible to them depending on their payments, on their credit and their overall situation. Now, you mentioned in the question that they're usually tapped out. Yeah. If someone is tapped out, what do you do?

It stinks. They should have sought advice earlier. Unfortunately, you can't beat them up of course, but that is what they should have done. They should have sought advice before they were tapped out. And it's tough. Option five, keeping the car, I think usually this is going to be the best solution.

It really is. And the reason is, again, as compared to the ratio. If somebody has a $10,000 car and they owe $11,000 on it and they're willing to buy a $1,000 car, well, in that situation, they might be more able to sell the car and buy a replacement. But when somebody owes a lot more than the money and if they can't refinance, then the best thing is just going to probably be to keep the car and try to just minimize the damage as much as possible until they can escape.

When you take into account the transaction costs, tax costs on buying the new car, the title fees, the new tag fees, the transfers, changes in insurance costs, things like that. Oftentimes people who are used to making these dumb decisions and cycling dead into the next car, into the next car, into the next car, they're not going to be confident making a really radical decision to really lower their costs.

So they're thinking, "Oh, I'm going to go from the $15,000 car to the $7,000 car." Well, what's the point? New transaction costs, you're shopping. Just keep the car that you have and pay the thing down over time. At least you've got the financing in existence – extent. So I think many times that really is going to be the best bet.

Now, here's where I think you can help possibly because you kind of mix two things here. What does a person do and then how do you help when you're doing financial counseling? The thing I think helps people in this situation the most is either the loan or gift of a car because if you can loan or give somebody a car, that can make a huge difference in their life.

And especially moving over into the world of what would I do if I were working with people in this capacity as part of my functioning in the church, I think this would be a good litmus test for can you reasonably extend benevolence to them as you phrased it. See, I think there are a lot of people who will apply for help and not be willing to do what it takes and not be really serious about it.

And what I would do is I would say, "Hey, here. I've got this car. It's $1,000. I'll give it to you or I'll lend it to you for the next two years." And that will help you to have something to drive so that you have the ability to go ahead and let's get rid of this one.

Let's sell it and let's get a little bit of money. At least they don't have to come up with more money on the top end. And then you can find out if someone is still laboring under the illusion of their image and their pride or they're willing to drive a cheap car so that they can get out of their mess.

So I personally like to have a cheap car. I mean I've got a $500 car right now that would – I plan to keep it. I want to keep it. I like the car and it's nice. But one of the great things about having a $500 car is it gives me an easy ability just to toss the keys to somebody and say, "Here, drive this for the next year." And I always keep an eye on – when I see a $1,000, $1,500 car, I always keep an eye on it and at least look at it.

Got to be careful of course with the mechanics and whatnot. But a lot of times you run across those deals and it might be good just to buy it and keep it on hand especially if you are laboring in a capacity there where you're going to have people that are needing help and needing a car.

Having a car to lend is so, so valuable when somebody is in a tough spot. In the most desperate situation like you described, that's about the only path out that I could see. It would be if somebody is tapped out, their credit is shot, they're probably paying high interest rates.

In that situation, you've got to get rid of the car because you've got to cut the interest rates and you've got to cut the amount of money they're losing on the $15,000. You've got to cut that $2,250 of depreciation this year. That's a lot of money for somebody who's broke to be losing in depreciation.

And so what makes the difference there is being able to say, "Here, drive the car. See if we can get a personal loan for some of the difference here and we'll make up some of the difference in a loan or a gift so that you can escape from the car." I think that is so, so valuable to do.

Beyond that, I would just say you've got to figure out a way to coach them to make more money. Sometimes you get into a situation where you've done everything you can. There's a series of bad mistakes and the key is extra money. And so whether that's the person working two or three jobs, whether that's them starting a side business, whether that's to upgrade their skills, sometimes you just need more money.

And you can face situations where more money – if someone would focus on that rather than on the debt, it will make a big difference. I can think of one situation I worked with a client of mine. This client had a startup scenario. They started a technology company. They funded the company out of their own pocket, out of their savings first.

They ran out of savings. The market was saying, "Hey, this is really, really valuable." They were getting a lot of traction. So they went ahead, continued financing it out of their pocket on credit cards, wound up with quite a bit of credit card debt, car debt all across the board, debt across the board.

But at every stage along the way, the market was saying, "Hey, there's opportunity here," and being a technology company, it had massive scalability. And one of the things that I can see happening with financial advice sometimes is people focus in on, "Well, I've got to get rid of the debt." Well, guess what?

There are times when you go into debt and you go deeply into debt because on the back end, the payoff is there. And so in this particular case, my client – I told him. I just said, "Just pay minimum payments. If you need to surf those payments around with balances and whatnot, let's just go for it because you're already so committed at this point and the market is giving you good feedback.

It's just a matter of time." And it worked. It's just a matter of time. So the company grew. Investments came. The series round came. The profits came. They figured out the market situation. And then in a matter of very short period of time, the money was paid off. That's very different than somebody else that I – so let me finish my advice to that client.

I said, "Just keep the car. Keep everything going. All you need to be focusing on right now is just staying afloat with minimum payments and doing the best you can to diminish the – to at least stay current. Do the best you can to stay current so you can continue to get financing." That was the advice in that situation.

But that client had tremendous income potential, tremendous business potential, and I just said that you dealing with selling cars and trying to figure this stuff out, it doesn't matter. In light of your potential income from this business that is working, this other stuff is irrelevant. That situation was night and day different from someone else that I had done a little bit of counseling for who was a cleaning lady.

And somebody asked me to help them. They worked at their work and I sat down with her one morning and we were talking and she was a minimum wage cleaning lady and she owned – I still remember it so clearly. She had a Honda Element and I thought about – she had a Honda Element and her car payment was $400 and something a month on the car.

She had bought it brand new from Honda and her income, it was some huge percentage of her income. She was making I think $1,500 a month. We're sitting there looking at the finances and I said, "You got to sell the car." But I'm upside down. I said, "You got to sell the car." And she had several years remaining on the term.

There was no possible way that she could make any progress whatsoever without selling the car. There was no way. So in her situation, she didn't take the advice. She didn't see a way out and I did my best, but it was tough and she made no progress. To this day, she continues to be broke as ever because the car was the issue.

So look carefully at the character of the person's situation. Look carefully at their income potential. Sometimes I think I would say sell the car, send it back, and even if they sell it at auction and they're a few thousand dollars down, if that can stop the bleeding, then sometimes I'd rather come back and make up a few thousand bucks in – a few thousand bucks that were lost because they fire-sold the car at auction when they repoed it.

Sometimes that's just what the situation is. People make dumb financial decisions and at the end of the day, you just take the best that you can. But I hope that helps. Like I said, you guys can tell I struggled with the topic. This was the best I could do.

I invite your comments. I invite your questions. It's my best shot at it. In general, the principles are lower the amount of money that people have going out and depreciating assets. Cars stink. Buy a car that's worth one-tenth of your annual income and you'll be rich if you just keep car expenses down.

In general, do that. In general, pay attention to cash flow and just try to figure out. In general, try to make the best, most intelligent long-term decision. Sometimes that can be to keep the car even if it's not ideal just simply because of the friction of the transaction cost of saying, "We're going to sell it and then a year later, we're going to upgrade and then we're going to upgrade and then we're going to upgrade." It's just – I don't know.

I don't buy that plan. So if any of you guys have some brilliant ideas for Travis, please come to the website for today's show. Share them with him. I invite your comment. Maybe you guys can teach me something on this. If any of you are a real expert on this, be happy to email me, joshua@radicalpersonalfinance.com, and I'll be happy to try to connect with you and learn from you on this situation.

But that's it. That's the best I got. And no matter how good this is, I am shipping this show. It's been tough. I've been hanging over my head for three days now, but it's out. This is it. Thank you so much for listening to the show. Thank you each and every one of you for your support on the Patreon page.

I need the support. I'm making some transitions. I'll try to share with you more, but I've got to get some office space. One of the things – this show has just been a beast, not only for the content, but I'm just re-recording it again because my kid woke up from their nap early, and then all of a sudden they're talking in the background.

So I've got to move to an office space, and it would be so helpful to have some new patrons of the show to be able to help me to plan on that. If you'd like to support the show, if you find value from this content, please go to radicalpersonalfinance.com/patron.

Sign up for a monthly contribution. Just pick how much it's worth to you. But if every listener to the show kicked in a buck or two, that would be tremendous. It would be hugely beneficial to me. So go to radicalpersonalfinance.com/patron, and I thank you for your support. I'll be back with you soon.

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