When it comes to getting out of debt, eliminating your monthly car payment is one of the most beneficial things you can do. That said, with the average car payment in America hovering somewhere between $300 and $550 per month, paying off your car loan can feel like an insurmountable obstacle. And if that’s how you feel, it’s only natural to start entertaining the idea of selling your car. In fact, before we go any further, I want to answer the question that likely led you to this article in the first place. That question is, should I sell my car to pay off debt?
In many cases, selling your car in order to pay off debt can be a good idea. This can be a particularly good option if: your car is your largest form of consumer debt, carries a high-interest rate, is worth more than you owe, or limits your ability to save and invest.
That said, in certain circumstances, selling your car may not be a worthwhile, or even realistic, option. Like everything else in personal finance, it’s important for you to weigh all the choices and pick the best option for your unique situation.
That’s why, for the rest of this article, I’m going to cover a few major considerations you should take into account when deciding whether or not you should sell your car to pay off debt.
Let’s dive in!
Should You Sell Your Car To Pay Off Debt? 5 Key Considerations
1. Do The Numbers Make Sense?
If you’re even considering the option of selling your car to pay off debt, the very first thing you should do is pull out a calculator and start doing the math. Because, here’s the thing, in some situations, selling your car might not actually get you very far. Or if it does, it might not make a big enough impact to warrant the time and energy it takes to sell the car.
As hard as it is to say, sometimes, the better option is to just pay off your loan as fast as you can.
For instance, let’s say you owe $8,000 on a car that’s only worth $4,000. That would still leave you $4,000 in the hole if you were to sell it. That might seem better at first, but what will you do for transportation? Will you have to go buy another car? If so, how do you plan to pay for it? Chances are, if you’re in the middle of a debt-free journey, you probably don’t have a ton of cash sitting around to throw at a new-to-you set of wheels, and all the other costs that come with it (i.e. taxes, title, registration).
After all is said and done, selling your car in a situation like this probably wouldn’t end up helping you that much. In fact, it might even cause you to lose a little focus, or get a little discouraged on your debt-free journey — which is a really bad thing.
As a good rule of thumb, if you can save yourself $1,000 of debt payments (or more) after selling your current car, and potentially buying a cheaper car, then you should consider selling your car.
Otherwise, you’re probably better off exploring options like getting a second job or selling other items around your house in order to pay off debt.
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2. Car Insurance Costs
One of the other key considerations you should take into account when thinking about selling your car to pay off debt is the impact it will have on your car insurance costs.
If by selling your car, you can eliminate a large monthly car insurance premium, then it might be a phenomenal option to consider.
Think about it like this, if you’re paying $150 for car insurance every month, that’s $1,800 per year that could otherwise go toward debt if you sell your car. And even if you had to buy a cheaper car, and purchase an insurance policy that costs $75 per month, that would save you $900 per year.
Come to think of it, whether you choose to sell your car or not, if you’re looking for ways to pay off more debt, then cutting your insurance costs is one of the best things you can do. Since car insurance is a fixed expense (i.e., a pre-determined expense you pay every month) reducing your premium is one of the best ways to fuel your debt payoff plan.
Oh, and by the way, if you do decide to shop for cheaper car insurance, I recommend using an insurance quote comparison tool like Insurify or EverQuote to make the process as simple and quick as possible.
I mean, who really wants to spend hours shopping for car insurance? Not me.
3. What Will You Do For Transportation?
I’ve already mentioned it a couple of times, but one of the main things you should consider before you sell your car to pay off debt is what you will do for transportation after selling your car.
If you have a second car, then this might not be that big of a problem. You can just drive that one around. However, if you’re considering selling your only car, then you’ll probably need to purchase a car to take its place.
Ideally, you can find a cheap enough car that you can afford to purchase outright. But if not, just make sure that you don’t end up further in debt than when you started.
That new car smell has a way of making people spend money they don’t have. So, if you do decide to sell your car, just remember to purchase something cheap and used. In fact, if you have a weakness for that new car smell, you might want to avoid dealerships altogether.
4. Do You Own Your Current Car Outright?
If you’re in the middle of a debt-free journey, and you happen to own your car outright, then selling your car to pay off debt can be a pretty attractive idea. After all, if you don’t have a loan on your car, then every penny you make from the sale could potentially go toward getting out of debt.
This can be a particularly good option if you have a second vehicle that you can use for all your transportation needs, and/or selling the car would eliminate a significant portion (or all) of your debt.
Ultimately, this decision boils down to personal preference. Would you rather keep your paid-for car and spend a longer amount of time to get out of debt, or sell it and speed up your debt payoff plan?
5. How Much Do You Like Your Car?
I don’t know about you, but one thing that bugs me about so many personal finance experts out there is that they seem to leave out the human element of financial decisions.
I mean, we’re not robots. In other words, our likes, dislikes, and experiences tend to play a large role in our decision-making process. And because of that, I’d be remiss if I left out one of the most important questions you should ask when deciding if you should sell your car to pay off debt: how much do you like your car?
I mean, do you like the way it drives? Does it have certain safety features that provide you with an extra sense of security when you buckle your kids in the backseat? Are you planning to keep it for the next 10 years? Does the idea of selling it cause you more anxiety than keeping it?
These are all valid questions to ask yourself. And honestly, if you really like the car, and you can pay it off in a reasonable amount of time, say 1 to 2 years, then keeping might not be a bad decision.
Then again, if you don’t have much attachment to it, then maybe selling it is a great option for you.
Depending on your financial situation, selling your car to pay off debt can make a lot of sense. However, before you put it up for sale there are a few things you should take into account. From doing the financial math to assessing the impact it will have on your car insurance costs, this is a decision that deserves some thought.
And if you’re trying to decide whether or not to sell your car as a means to pay off some debt, I hope this article provided you with the insight you need to make the best decision possible.