How to Get Out of Your Upside Down Car Loan

Do you have the new car bug, but you’re upside down on your current car? Read on to learn how to get out of your upside down car loan.

Americans are behind on their auto loan payments. As many as 7 million Americans are at least 90 days behind on their loan. This isn’t the only problem car loan borrowers have; many face an upside down car loan. 

If you are struggling with your car loan, you have options. We are going to help you breathe easy and get out from underneath your upside down loan.

Try these tips and get right on the road again. 

What Is an Upside Down Loan? 

If you are upside down, it means that you owe more on the loan than what the car is worth. You may also hear of it referred to as being underwater or having negative equity. 

Let’s look at a working example. If you owe $10,000 on your car loan, but the car’s market value is $8,000, you are upside down in your loan. You have negative equity valued at $2,000. 

Why Is Negative Equity Bad?

Are you wondering why this is a problem? After all, you’ve made all of your payments in full and on time. This is where things get tricky, there technically isn’t a problem, until there is a huge problem. 

The problem occurs when you need to pay off the balance of the loan, but you discover the value of the car isn’t enough to cover what you owe.  

Scenario One

If your car is totaled in an accident, the insurance company will only give you what it is worth, not what you owe. This could leave you owing thousands to a lender and no car. You aren’t excused from the loan just because the collateral no longer exists. 

Scenario Two 

Now let’s consider a different situation. You bought a hot little sports car during your single and free days. But now you have little ones, and you need something more practical. 

You head to the dealer and realize that even though you’ve made all your payments, you still owe more than what the car is worth. To trade the vehicle in, you’ll need to pay off the negative equity. 

This means you’ll likely not have any money left over to put cash down on your new vehicle. 

How to Fix Your Upside Down Loan 

There are a few different ways you can get out from underneath your loan. The key is to not let yourself get in deeper. 

Continue Making Payments 

Make sure you continue to make your full payments on time. This will prevent more fees and interest from multiplying. It will also protect you from defaulting and having the car repossessed.

In many states, lenders seek the difference between the car value and the loan balance in the event of a repossession. Don’t put yourself in this position. 

Pay Until You Have Positive Equity 

Check to see if your lender will let you make extra payments. Ask about penalties or fees for making extra payments. Request to have your additional payments applied directly to the principle. 

This way, you lower the balance owed on the loan faster and reduce the amount of interest that will accrue. It will also lower your negative equity and get you back to positive as quickly as possible. 

A second benefit to this strategy is that your diligent payments will increase your credit score. This will make it easier to get a new loan once you pay off this one. 

There is some risk associated with this method. You need to hope that nothing happens to the car while you make your payments. If you still have negative equity and the car gets stolen or totaled, then you still owe the balance.  Would you continue making payments on this 1961 Chevy Impala? 

Sell the Car 

You could always sell the car and use the proceeds to pay down the loan. To make this method effective, you’ll need to get the highest amount possible for your vehicle. You’ll also want to avoid these mistakes so that you can accomplish this. 

To get the most for your car, you’ll need to sell it yourself. Try listing your vehicle by owner with an amount higher than you need. This will give you negotiating room. 

Loan Refinancing 

A third way to fix your situation is to refinance your loan. This can be difficult as many lenders aren’t interested in loans with a high amount of negative equity. However, if you can come up with some cash to bring your LTV ratio to 100%. 

Focus on community banks and credit unions; these are your best shot for approval. 

Trade-In Your Car 

One way to get out from under your loan is to trade in your car. However, this probably isn’t your best option. The dealer won’t offer you the full value of your vehicle, which means you’ll receive less to pay down the loan. 

Do not trust a dealer that claims to pay off the value of your loan. This is a huge red flag and will ultimately put you in a worse financial position. 

It is true; they will pay off your loan. But they will turn around and apply that balance to your new car loan. Now you have to pay this new total off which puts you at a bigger risk of getting upside down all over again. 

Get out From Under Your Upside Down Car Loan

As you can see, there are several ways that you can get out from under an upside down car loan. Start by determining just how far underwater you are. Then look at your current financial situation and evaluate which option is best for you. 

Be sure to check back for the next edition of our magazine for more great articles. 

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