QUESTION: Tramaul in Atlanta brings home $2,700 a month and has $2,000 in payments. His $15,000 car is his largest debt. Tramaul believes he can pay it off within two years. Does Dave think he should sell it?
ANSWER: A good rule of thumb is this: You don’t want to have debt on all your vehicles combined be more than half your annual income. If you do, then you have too much tied up in things that are going down in value. You make about $40,000 a year and your car loan is $15,000, so you are under half, but it’s still pretty expensive.
The second rule of thumb is to ask yourself if you can pay it off within two years, and I think you can. You must stay on a real tight budget and watch what you’re doing. You say that your tax refund is $2,000. Let’s throw all that at the car. If you are going to keep the car, let’s get it paid off. Let’s commit to knocking it out as fast as possible.
If you are willing to do that and knock the debt out in two years, then I would keep it if you like the car.