You are upside down on a car loan when you owe more than your vehicle is worth. It occurs frequently, but there are steps you can take to lessen the long-term financial harm it can cause.
So you’re upside-down on your car loan. That means you owe more than your vehicle is worth. It’s a bummer, but don’t worry, there are ways to get out of it.
First, let’s figure out how much negative equity you have. Subtract the current market value of your car from the remaining loan balance. You can use resources like Kelley Blue Book, Edmunds, or the National Automobile Dealers Association Guides to find the market value.
Once you know your negative equity, you have a few options:
1. Pay it off in a lump sum: This is the best option if you can afford it. It will get you out of debt faster and help you avoid further depreciation.
2. Refinance your loan: If you have good credit, you may be able to refinance your loan at a lower interest rate. This will lower your monthly payments and help you pay off the loan faster.
3. Sell your car: This is a good option if you don’t need a car or if you can get a good price for it You can use the money from the sale to pay off your loan and avoid further negative equity
4. Trade in your car: This is a quick and easy option, but it can be expensive. You’ll likely end up rolling your negative equity into the new loan, which can lead to more debt.
5. Keep making payments: This is the least desirable option, but it may be your only choice if you can’t afford any of the other options. Just make sure you’re making at least the minimum payments to avoid defaulting on your loan.
Here are some additional tips to help you get out of an upside-down car loan:
- Make extra payments: If you can afford it, make extra payments towards your principal. This will help you pay off the loan faster and reduce your negative equity.
- Avoid taking on more debt: Don’t take out a new loan to pay off your car loan. This will only make your financial situation worse.
- Consider a personal loan: If you have good credit, you may be able to get a personal loan with a lower interest rate than your car loan. You can use the personal loan to pay off your car loan and save money on interest.
- Talk to your lender: Your lender may be able to offer you a repayment plan or other options to help you get out of your upside-down car loan.
Getting out of an upside-down car loan can be challenging, but it’s definitely possible. By exploring your options and making smart financial decisions, you can get back on track and avoid further debt.
Frequently Asked Questions
Q: What is negative equity?
A: Negative equity is when you owe more on your car loan than your car is worth.
Q: How do I calculate my negative equity?
A: Subtract the current market value of your car from the remaining loan balance.
Q: What are the best ways to get out of an upside-down car loan?
A: The best ways to get out of an upside-down car loan are to pay it off in a lump sum, refinance your loan, or sell your car.
Q: What should I do if I can’t afford any of the options?
A: If you can’t afford any of the options, you should keep making payments on your loan and avoid defaulting.
Q: Can I get a personal loan to pay off my car loan?
A: Yes, you may be able to get a personal loan to pay off your car loan if you have good credit.
Q: Should I talk to my lender?
A: Yes, you should talk to your lender to see if they can offer you any options to help you get out of your upside-down car loan.
Additional Resources
How You Get Upside Down on a Car Loan
Let’s face it: Getting a new car is exciting. Unfortunately, excitement and financial smarts don’t always go hand-in-hand. Excitement can result in an upside-down car loan in many ways.
- Insufficient research: A lot of buyers don’t look into the prices of comparable models. You are already upside down on your new car if you purchase it for $30,000 when comparable models are only selling for $27,500.
- No-downpayment loans: Automobiles lose 20%500% of their value by the third year of ownership due to depreciation, so the less money down, the more upside down you will be.
- Long-term loans: Although you can manage your monthly payments with terms of 72 or even 84 months, you still have to pay for a car that is at least five years old. Payments for that long can’t keep pace with depreciation.
- Roll-over loans: The dealer will frequently allow you to transfer the negative equity from your previous vehicle to your current loan. This indicates that you are paying more than the new car is initially worth.
- Unnecessary options: Avoid being pressured into purchasing features like a sunroof, leather upholstery, heated seats, or technology that connects to a smartphone that you don’t need or won’t use. Options increase debt and cannot be recovered when the vehicle is sold.
- Expensive car: Purchasing a car that exceeds your means will put you in competition with other bills for housing, food, school loans, and other necessities.
- High-interest loans: Arrange your financing in advance of visiting the car dealership, and resist the urge to accept dealer financing, which carries a higher interest rate.
Refinancing an Upside-Down Loan
Refinancing with a new loan can also get you out of an upside-down car loan. Refinancing enables you to pay off the car faster or at least gain some equity if interest rates are lower than when you took out the original loan. Large lenders usually aren’t interested, but a community bank or credit union may consider the option.
If you can save money on interest and you own a home, a home equity loan might be a good choice for you.
Additionally, you might be able to move the remaining balance on your auto loan to a credit card with a 20% introductory offer. When the introductory period ends—12 to 18 months for the majority of cards—refinance the remaining amount with a peer-to-peer lender or credit union.
» Learn More: Paying Car Payments with a Credit Card