I have been so excited to share this article by Katie at Chain of Wealth. The lessons Katie learned are valuable for each of us as we navigate the sometimes difficult decisions with our money. Without further delay, here is her excellent article on negative equity with an important lesson on co-signing on a loan.
Negative equity, $20,000, seven-year loan, debt, credit score were all of the words that were swirling around the Honda dealership in 2015 when I had to take the biggest sucker punch.
As the old saying goes “no good deed goes unpunished” was the absolute truth for me. I tried to help a “friend” out and got nailed for a $20,000 bill.
Investopedia defines negative equity as “Negative equity is when the value of an asset falls below the outstanding balance on the loan used to purchase that asset.”
In other words, when you owe more on a loan than the value of the item that you are financing.
My whole life I tried the make the right decisions. I worked hard in school, didn’t get in trouble and went to work every day. I had not made any huge terrible life decisions… until I was twenty-six years old. And to this day, I still have not made another dumb decision as I am about to tell you.
At twenty-six years old, I had tried to help out a friend with bad credit.
“If you could just co-sign the loan for me, the interest rate will drop. I promise to make all the payments; it will be no problem to you.”
If I could go back in time, I would shake some sense into my naïve self. Everything that was “promised” was a complete lie.
After one big fight and a ruined friendship, the car was suddenly a “gift” that I had to pay for.
I could not believe what was happening to me.
I was a third-grade teacher, I would splurge and buy a friend a cute pair of earrings or even a $50 purse as a gift. I would never buy someone a car… but in the end, that is exactly what I had done.
When the dust settled and life had to go on I found myself having to sell my 2002 paid for Toyota Corolla to have more money to put down. I traded in “the gift” to get something that only had my name on it- the blue devil as I liked to call it was a 2015 Honda Crosstour. Now it was a lovely car. Comfortable, heated seats, side, and backup cameras but it was not a cheap trade in. Thankfully, at least the guy in charge of financing felt bad for me (you know you’re in a rough spot when the car salesmen feels bad for you) and gave me a really good interest rate.
The Long Road to Freedom
I like to think that karma has a way of working things out.
Yes- I got nailed for the negative equity. I went to lawyers and there was nothing I could do to get out of this mess immediately.
Thankfully, my mom let me move in with her and I was able to save up some money. The only choice I had was to get a second job. With the extra income, I was able to save almost my entire teaching salary and I bought a small townhome on the outskirts of town.
I got really lucky because I bought while the area was undeveloped, therefore, cheap. I was able to turn around one year later and sell the townhome for a 20% increase- aka enough money to get rid of my car.
You can read more about negative equity on my website.
I sold the house because again, life changes and I was afforded the opportunity to move to Virginia. (right outside of Washington DC) In this area, cars are not needed at all. Everywhere is accessible by walking, bus or metro and it’s quite pricey to have a parking spot in the city so the decision to get rid of the car was a relatively easy one and I don’t really like driving so I was all about getting rid of the car.
On a cold Saturday afternoon, I decided that I was going to go to a car dealership and see what they would offer to buy the car. (I had been trying to sell it privately with no luck at all) I went to a few places and after some shocked looks and moans and groans, I finally found a dealership that said they would take it for a fair price.
“Come back on Monday and we’ll have a check over it and then it will be done. “
I couldn’t believe it! After months of struggling and paying, to know that I could be down to my last 48 hours was surreal. I was so excited but tried my best not to get my hopes up.
I will admit, going back alone, as a young female, I was a little apprehensive if they were going to suddenly give me the runaround. They didn’t. I am happy to report that it was actually a very easy process and all the gentlemen were very friendly and helpful.
Finally, on the Monday after Thanksgiving (also known as Cyber Monday) while everyone else was busy online shopping, I was busy taking the Metro back from Bethesda, Maryland where I had just sold my car to a dealership and all of the negative equity along with it. Okay- I had to write a check for $15,000 but It was like a boulder had been lifted off of my back.
$15,000 is a ton of money and I understand the cringe to plunk down so much money all at one time. I actually had never spent so much money all at one time before but honestly, it was the best money spent. Now I am finally free of the negative equity.
The Journey Continues
Now, I wish that was the end of my story and I could tell you that I am 100% debt free- but I am not.
Yes, I have sold my house and my car which were a huge part of my debt but now I am onto conquering my student loan debt.
Myself, like so many others, have student loan debt and it does not just go away (trust me, I tried- it doesn’t work)
Now, I am thankful to be able to take all the money I was spending on the car payment, parking, insurance and gas and apply it all straight to my student loans.
My goal is to have all of my debt paid off in one year- I plan to do this mainly with side hustles such as Airbnb.
Like so many other people, I don’t seem to learn anything the easy way. But take my advice on these few things:
DO NOT CO-SIGN A LOAN
You are not the only one who has done this. I have talked to many people who have been in this same situation.
If you do find yourself in a jam, it’s okay but you need to make a plan.
You are smart- you will work your way out
Karma goes around. I don’t know whatever happened to my “friend” and honestly, I don’t have any interest to find out. What I do know is that I was trying to help someone and since then it seems as though karma has been on my side.
Bought and sold a house
Didn’t need my car anymore
Had enough money saved to get rid of the negative equity.
I will admit, it was a really expensive lesson to learn. I know I will never be that foolish again. As my second decade is about to end, I am excited about all of the new opportunities that are waiting. Opportunities that I never thought would have happened on that dark day in 2015 at the Honda dealership.
I don’t own “the blue devil” anymore and I hope it finds a great home with someone who has a lot less debt than it gave me.
Katie runs a personal finance and wealth podcast called Chain of Wealth.
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