Dave Ramsey Says You Have to Sell Your Car in This Situation

If you're having this issue, Ramsey thinks selling could be the best solution.

If you are buying a car, chances are good you are going to end up taking out a loan in order to do it. Paying cash for a car can be hard. And, a lot of people borrow instead of waiting until they have enough in their savings account because they need a vehicle right away.

If you have taken out a car loan to buy a vehicle, there is a chance you could end up owing more than your car is worth. This is called being "upside down" or underwater on your car loan. If you find yourself in this situation, finance expert Dave Ramsey believes you need to sell your vehicle.

But, should you?

Here's why Dave Ramsey thinks you need to sell your car if you're upside down

According to Ramsey, selling the vehicle is your best solution if you no longer want to owe more on your car than it is worth. "If you want to get out of an upside-down loan, you've got to sell the car," Ramsey said. "That's right -- it's time to amputate the Tahoe (or whatever car you're underwater on)."

The problem, however, is that selling the car isn't going to generate enough money to pay off the loan balance in full. That's the very definition of being upside down on the car loan. Ramsey acknowledges this issue, and says you'll have to come up with the cash to pay off the remaining loan balance after you have sold the car.

According to Ramsey, you can find the money to pay off the remaining balance of the car loan either by waiting to sell the car until you've saved enough money to pay off any outstanding amount due. So, if you were $5,000 short on being able to pay off the loan after selling, you'd wait to sell until you had saved up the $5,000.

The other option he says you can consider is taking a personal loan for the difference between what you owe and what you can sell the car for. "If you're drowning in car payments or you're just plain sick of looking at the stupid thing sitting in the driveway, getting a personal loan so you can move on quickly is probably the best route for you," he advised.

Should you follow Ramsey's advice?

Before you decide to follow Ramsey's advice, you need to think carefully about whether it makes sense for you because sometimes it does and sometimes it doesn't.

If your monthly car loan payments are taking up so much of your budget that you can't do other things, then you should sell your car and buy a cheaper one. You should do that ASAP because otherwise you're going to keep falling further and further behind as you struggle to make that payment each month.

This is true whether you are upside down on the car or not -- being upside down just adds complexity to the situation since you have to come up with that extra cash. Still, it's worth trying to get the car payments out of your budget, as long as you're then committed to either going without a vehicle for a while or opting for the cheapest car you can find so your new payments are much more affordable for you.

But, if you can afford the monthly payments on the car you currently have, selling it isn't likely to really improve your financial situation. You'll have just spent a ton of money to try to get the loan balance paid off only to have to buy another car. If you don't have the cash to do that, you'd be getting another loan, which would mean you'd need a down payment for it and you'd risk going underwater again if you didn't make a big enough one.

There's really very little reason to struggle to come up with cash and then turn around and sell your car just because you're underwater unless you are having a separate problem with the loan.