Dear Debt Adviser, I have two credit cards each at 13.99% totaling $9,100 of debt. I also own my truck outright. It is valued at $11,000. I make $400 in total payments to my credit cards per month. My idea is to sell my truck, pay off the credit cards and buy a used vehicle for around $15,000. This would be lower than what I currently pay to my credit cards. I understand this will increase my total debt, but it will be at a lower rate and it will be a secured debt versus an unsecured debt. Is this a good move? -- Brad
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Dear Brad, So, you want a new truck! That sounds like your real motive to me, rather than making a smart financial move. It's your money and your life and, yes, your truck. So you can do what you like. However, turning $9,100 worth of debt into $13,100 worth of debt is not a great financial decision.
Looking at your question from a purely financial standpoint, no, selling your truck you own free and clear to pay off your credit cards does not seem like a great move. Also, changing unsecured debt into secured debt is not typically the direction you want to move your debt. Why? Because if something happens such as an illness or employment interruption and you are unable to make payments on your credit cards, the card issuers would have to wait for their money (admittedly with fees and penalties).
On the other hand, if you defaulted on your vehicle payments because you were sick or out of work, the creditor could repossess your truck, leaving you with no transportation to get you to and from your new work. You also would most likely have a large loan balance to repay.
So, if you are asking the question because what you really want is to purchase a different vehicle, then what you are proposing has some merit. What I want you to try to avoid, if possible, is being upside down (owe more than what the vehicle would sell for) in your truck loan. For the situation you describe in your letter, assuming your current vehicle sold for $11,000, you would pay off $9,100 in credit card debt and that would leave you $1,900 to use as a down payment on your new auto loan. If the vehicle you want to purchase is $15,000 that would leave you with $13,100 to finance.
Depending on your credit score, you may qualify for a loan with an interest rate of 5% or so. Finance $13,100 for four years at an assumed 5% interest, and your monthly payment would be approximately $300 per month. I recommend you add another $100 per month to match what you are currently paying on your credit card accounts. If you add the extra $100 to your payments, you will pay off the loan in three years, save almost $400 in interest charges and help avoid owing more than your vehicle is worth.
Because you would be changing unsecured debt into secured debt with this action, it is important to keep what you owe below what your vehicle would sell for. That way you could always sell the truck to satisfy the loan and not have to worry about repossession and the damage to your credit that would follow.
Personally, I would rather see you do one of two things instead of getting a new truck. I would prefer you kept the truck and aggressively paid down your credit card debt. That way you are debt-free fastest. Or, you could take out a loan on your current paid-off truck and pay off the cards. While that isn't my ideal scenario, it would at least keep an additional $4,000 worth of debt off your shoulders.