Ask The Money Coach

Posts Tagged ‘auto loans’

Here is a clip from an interview I did with ABC News where I explain the differences between good debt and bad debt. If you don’t have time to watch this video, here is a short summary:

- Mortgage Debt: Good Debt
* It’s tax deductible
* Homes can appreciate
* Real estate ownership can build wealth

- Credit Card Debt: Bad Debt
* It’s not tax deductible
* Has Higher Interest Rates
* Can Hurt Your Credit Rating

- Student Loan Debt: Good Debt
* May be tax deductible
* Carries Low Interest Rates
* Can Boost Earnings Power

- Auto Loan Debt: Bad Debt
* Is Often Ego-Driven
* Cars Depreciate Immediately
* Loans Outlast Warranty or Value (explanation: some people pay on cars for 5 to 7 years, long after their warranty has expired and sometimes after a car has outlived its usefulness)

- Wedding Debt: Bad Debt
* Emotionally Driven
* Can Limit Future Options (Like buying a home)
* Is Created for a Single Day

Q: My Mom Will be the Principal on a Car Loan, I will be the Co-signer, Will This Negatively Impact My Credit?

A: Becoming the co-signer on a new car loan will not hurt your credit score unless you or your mother fail to meet the terms of the car loan and start to miss payments.  Your email indicated that you already have many charge-offs on your credit records. Therefore, your credit scores are likely to already be very low, which means you will not qualify for a home loan, something else you also asked about.  People who buy their FICO credit scores or subscriber FICO’s credit monitoring service (http://www.Myfico.com) can get access to an online credit simulator which can show you want actions you need to take to increase your credit scores to qualify for all kinds of loans.

Question:

I have a question from a reader today who wanted to get some information about an auto that was actually repossessed via voluntary relinquishment. He wrote to me saying, “I’m recently divorced, and my ex decided to voluntarily relinquish a car that was in both of our names just before our divorce was final. I got a letter from a collection agency demanding more than the car was originally worth. The divorce papers state we’re equally responsible, but I know she’ll never pay because she can’t even pay child support.” He said he has custody of his child and can’t afford to pay anything at this time without some help from her in terms of keeping up with all of his other bills. So his question really boiled down to this. He said, “I pulled my credit report, and it shows the repo, but it also shows an amount on the report that is less than a quarter of what the agency is demanding. Can I use this information as a bargaining tool to get them to settle?” He also mentioned he was told to file bankruptcy, but he’d already done that back in 2005.

Answer:

First off, no, don’t think about filing bankruptcy just due to a car loan that was in both your and your ex‑wife’s name, even though the amount owed might be considerable relative to your income. What I think you should do is, yes, by all means, try to negotiate with the collection agency that has reached out to you, and let them know, in no uncertain terms, that you are cash‑strapped, that you are a single father, that you’re raising your child on your own, and that the amount that was due, obviously, you’re aware of the fact that it’s legally your responsibility and your ex’s, but that they’re asking for a multiple of what is the amount that the car was actually worth and three to four times what’s actually shown on your credit report.

Don’t be afraid to let them know that you have seen your credit report recently and that you know that there’s a huge difference in terms of the amount that they’re trying to demand and the amount that’s shown on your credit report. I would suspect that this will be a huge point of leverage to use in the course of your negotiations, because a lot of times collection agencies try to say, “Look, we’ll ruin your credit. We’ll put something on your credit report.” And your defense to that is, “Hey, the information is already there. It’s already showing up on my credit report. I’m merely trying to clear up the matter.”

What I would suggest that you do, in terms of offering a settlement amount, is either try to pay a lump sum and get it all done and over with in one fell swoop, or only commit to a monthly amount that is modest and firmly within your reach in terms of paying every single month without fail. I don’t like the idea of a monthly payment plan to pay off an old collection account, especially for a repossessed car that you’re not getting any value out of, as much as I like the idea of doing a lump sum.

If you negotiate a lump‑sum payment to pay off X amount and get this debt taken care of once and for all, try to get something called a PFD, or a pay for deletion. That’s where you agree to terms with the collection agency about an amount that will settle up the past‑due bill, and that amount will be considered acceptance of payment in full. In exchange for you making that cash payment, the collection agency will agree to delete all negative information from your credit reports, that is, from your Equifax, Experian, and TransUnion credit reports. They won’t always agree to this, but you should certainly ask for it.

If you can get them to do this and to agree to that, make sure you get a letter in writing from the collection agency, upfront, before you turn over any money. That letter would be proof that you might need later if they don’t hold up their end of the deal and if you have to go to the credit bureau and dispute the information and say, “This was supposed to have been deleted from my report because I paid it per an agreement between myself and the collection agency.”

So I hope this information helps you. Good luck raising your child.

Related articles

• What’s the Best Way to Get Negative Information Removed From My Credit Report (askamoneyexpert.com)
• Key Differences Between Equifax, Experian and TransUnion Credit Reports (askthemoneycoach.com)

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Anytime you have a substantially reduced income, or an outright elimination of income, it means you have to completely overhaul your budget. A few tweaks, changes and minor pullbacks here and there just won’t do. You’ve indicated that your income is off by 50%. As a result, you must drastically slash your current or previous spending, and also think about creative ways to raise cash. Otherwise, you risk falling deeper into debt.

How to Overhaul Your Budget

Before you look at “extras,” and any “luxuries” you may be spending money on, start by examining the very basics: like your phones, housing and car. Often, the things that we think are “necessities” have to be sacrificed just temporarily when there is a major shift in income. Since you are a self-employed as a massage therapist, it may be the case, for example, that you have multiple phones. Perhaps a cell phone, a business phone and a personal home phone. If so, consider which one – or maybe even two – of those phones you can live without on a temporary basis until you restore your income. This is the kind of thinking that will help you figure out how to get through this economic rough patch. This advice is also applicable to anyone who:

•    Has been laid off recently, for a long time, or expects to be unemployed soon
•    Has seen a big decline in self-employment income
•    Has had has their hours on the job cut
•    Has had their hourly salary or regular pay slashed
•    Has found a new job that is substantially less than the income previously earned

Lifestyle Choices

Overhauling your budget also means making tough choices about your lifestyle. An example of a major lifestyle change might be considering where you live. Do you rent or own? Can you find cheaper housing, a less expensive neighborhood, or is bringing in a roommate an option? Also, what about the car you mentioned? You said you drive only when you must. Can you sell the car and use public transportation? If you have car payments, is getting a friend or relative to take over those car payments at all feasible? I recognize that these are big shifts. But sometimes you have to dig deep when things are far more challenging than the norm. That’s why I usually recommend these strategies for people who are extremely deep in debt, or for those who have had major reductions in their income.

Negotiating and Bartering

As you consider your options, don’t forget about one of the best budget-saving strategies of all: negotiating. Whenever you are about to buy something, ask for a discount. Ask for a discount for paying for goods and services, like medical care, in cash instead of with credit. Ask for a discount if you’re at a store and you’re buying two or three of an item, instead of just one. You can even ask for, and negotiate, to receive products and services free of charge – if you’re willing to exchange your time, talents and services as well. For instance, you said you are a massage therapist. I imagine this is a stressful period for accountants. Instead of paying a CPA to do your business tax returns, maybe you can offer to provide a one-hour massage or treatment to your accountant. The idea is to think creatively about how you can both exchange value – without exchanging dollars. That’s a win-win situation for both parties and one that will help you to more quickly bounce back from your economic slump.

Related articles

• How did Lynnette Khalfani-Cox erase $100,000 in debt in 3 years? (askamoneyexpert.com)
• How Debt Can Ruin Your Relationship (askthemoneycoach.com)
• Best Careers 2011: Massage Therapist (money.usnews.com)

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