I am currently in Iraq serving with the Air Force, but will return in January with $10,000 in my savings account. I owe $13,000 at 5.6 percent interest on a car that is worth $9,000. I desperately would like to get into a home when I return.
Should I continue making payments on the auto loan and pay it off before saving a down payment for a home? Or should I sell the car and “eat” the upside-down amount, using the remainder to start my house fund and try to get into a car at a better ratio?
— Paul Bond
I would advise you to continue making payments on the car until the loan-to-value ratio swings in your favor and you can trade it for something cheaper. You have the start of a nice down payment on a house and to wipe out much of that on a depreciating asset like a car would not be the best course of action.