Dave Ramsey: How To Get Out of Your Underwater Car Loan
Written by
Yaël Bizouati-Kennedy
Edited by
Daria Uhlig
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Financial expert and “The Ramsey Show” host Dave Ramsey recently spoke to a caller on his namesake show about how the caller could get out of his underwater car loan.
Being underwater on your auto loan means you have negative equity because you owe more than the car is worth.
“For example, say you still owe $30,000 on a car that you’d like to sell or trade in, but the most you’ve been offered is $20,000. That’s $10,000 in negative equity you’ll have to deal with,” Credit Karma explained.
That negative equity puts you underwater on your loan. And it generally puts borrowers in the position of having to choose between continuing to pay the loan while getting deeper underwater and selling or trading in the car and paying the remaining balance out of pocket.
In the July 9 “The Ramsey Show” video, which appears on YouTube, the caller told Ramsey he still owes $32,000 on the vehicle, making it one of his biggest bills.
Ramsey asked the caller if he had looked up the retail price of the car on sites such as Kelley Blue Book to see what it is currently worth — something he strongly urged individuals in similar situations to do.
The caller hadn’t researched retail prices, but based on wholesale prices the caller had seen, Ramsey estimated the value to be about $27,000.
Refinancing was not an option due to the seller’s low credit score. Ramsey’s solution?
“We need to sell the car,” he said, adding that to make up the difference between the $32,000 loan balance and the $27,000 value, the caller needs to come up with $5,000.
“We need $5,000 to put with it to be able to pay the car off right off. And that gets rid of the whole stinking problem,” Ramsey said.
During the call, Ramsey cautioned against selling cars with underwater loans to companies like CarMax because they’re “trying to rip you off.”
Such companies are “in the business of buying cars at wholesale and selling them at retail — that’s how they make a living.”
Other options to get out of an underwater car loan include simply trading it in at a car dealership, which could provide relief by applying its trade-in value toward a new vehicle purchase or lease.
However, it’s important to keep in mind that while dealers sometimes have trade-in offers, “if the dealer promises to pay off your negative equity, make sure it’s not included in your new financing or your final loan contract,” the Consumer Financial Protection Bureau website advised.
Otherwise, you’ll likely be underwater with the new car, too.
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