Sunday, November 27, 2022

How To Get Out Of An Upside Down Car Loan

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Look At Refinance Rates

Upside Down In Your Car Loan? Try These Tips!

Refinancing could help you get a lower auto loan APR. The less you pay in interest, the faster you can pay off the negative equity. A shorter loan term can help you qualify for a lower rate and cause you to pay off the loan even more quickly, speeding up the time to get right-side up again on your car loan.

Find Out How Much You Owe

First things first: You need to look on Kelley Blue Book for the current value of the car so you know exactly how upside down you are on the car. Once you have an amount, you can go from there to figure out what your next steps will be. Before you move forward, be sure to cancel any warranties or extra services you have on the car, if any. These are surefire ways to lose cash fast.

How To Refinance Your Auto Loan

Because youre taking out a brand new loan when you refinance, you can change the term, or length of how long you have to pay back the loan. If you originally took out a three-year loan but found it difficult to keep up with the high payments, you could refinance to five years. Keep in mind that a longer loan term means you will pay more over the life of the loan in interest.

Before you jump into a refinance, make sure you wont have to pay any fees or penalties for paying your current loan off early. Once you confirm you wont get charged, you can start shopping around for the best interest rates online.

Remember that you can still shop around for the best score within a certain time frame and the hard pull will only count as a single inquiry. This is referred to as rate shopping.

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What Is Negative Equity

The term equity refers to the ownership of assets that have connected liabilities. Liabilities are usually in the form of outstanding debts or loans.

When it comes to liabilities on a car loan, this usually refers to how much you still owe the lender. Negative equity happens when the amount owed is higher than the cars actual value. Some people also refer to this as upside-down or underwater car loans.

Either way, this means that you owe more money to your auto loan lender than the cars financial worth.

Its quite easy to find out if you have negative equity by knowing these two primary factors. Then, simply subtract your outstanding auto loan balance from your rides market value. If it shows up negative, then you have negative equity.

Lets use the outstanding average car loan debt of $20,000 in Canada as an example. Lets also say that your vehicles actual market value is now only $15,000.

So, $15,000 less/minus $20,000 . This means that you have negative equity amounting to $5,000.

Reach Out To Your Lender

How to Get Out of an Upside Down Car Loan with Negative Equity ...

If youre not in the position to pay down your negative equity in one fell swoop, you still have several alternatives worth considering.

The next step is to give your lender a call. Explain your situation and ask about any options it may offer to help turn the underwater loan around. Even if the lender says there are no options, it doesnt hurt to ask.

If theres room in your budget to pay extra money toward your principal each month, ask about setting up this option. Paying extra will help you get out of the loan faster and may allow you to bring down the balance at a rate that outpaces your cars devaluation.

While youll still have to cover your negative equity, keeping your vehicle and paying off your loan can help you make the best of a bad situation.

It may be more painful in the short term, but at least youll have some equity to work with when you shop for a new vehicle later.

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Build Your Credit To Maximize Car Loan Savings

Whether or not you’re upside down on your car loan, your interest rate is one of the most important features of your car loan. If your credit is in poor shape, interest rates can climb upwards of 20%, making monthly payments difficult to afford. What’s more, it’s more likely that you’ll end up underwater because so much of your monthly payments is going toward interest charges.

So, whether you’re planning to buy a new car or you’re trying to figure out what to do with your current one, your best bet to maximize savings is to improve your credit score. With Experian’s free credit monitoring service, you can get access to your credit score and your Experian credit report, allowing you to see where you stand and determine which areas you can address to improve your creditworthiness.

You can also track your progress and see how your actions influence your score. This process can take time, but when you’re ready, you can apply for an auto loan or a refinance loan with better chances of securing a favorable interest rate.

Beware Of Rising Interest Rates

As you can see, both consumers and dealers are coming up with highly creative ways to deal with this growing issue. The biggest danger is that rising interest rates even increases as small as one percent could equate to an increase of several hundred, or even a few thousand dollars over the life of the loan. With some loans being financed for terms as long as 96 months , the effect of rising interest rates and the practice of rolling-over an existing loan into a new one could result in an unfortunate situation that would negatively affect your personal financial health. And all for a new car.

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What If I Cant Afford My Car Loan

If you cannot afford your car loan, then you need to figure out a way to get out of the loan. This could be selling your car, negotiating with your lender, or finding someone to assume the loan. Your last resort should be to stop making payments and default on the loan because it will have a negative effect on your credit report and score.

Transfer The Auto Loan Or Get A Cosigner

Get Out of Your Upsidedown Car Loan

To Another Individual

You can get out of a car loan by transferring it to someone else. This person then assumes responsibility for the loan terms and monthly car payments.

However, its not as simple as it sounds.

Lenders rarely allow you to transfer your car loan to another borrower. Your loan contract could clearly state that the loan isnt transferable. If it does allow transfers, it should spell out the criteria for transferring your car loan are listed in your loan contract. Either way, read it carefully to determine whats possible.

If your lender does allow you to transfer your car loan to someone else, that person must apply for the loan and meet the same underwriting criteria you did when you first took it out.

After the lender approves the transfer, youll need to act as if you sold the vehicle which you effectively did. This means signing a bill of sale and visiting the DMV to transfer the vehicles title.

In other cases, a lender wont allow an actual transfer of the loan itself. Instead, theyll allow you to take on a cosigner. Your cosigner becomes equally responsible for paying down the loan balance.

Onto a Credit Card

An alternative to transferring your car loan to another person is to transfer it to a . But this can be tricky.

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Save On Your Insurance

Paying less for your car insurance can help you save the money you need to afford a shorter-term loan.

Key Takeaway Afford a shorter loan term by choosing a low APR loan, refinancing for better terms, leasing instead of buying, putting down a down payment of at least 20%, and freeing up cash by saving on insurance costs.

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Trade It In For A Less Expensive Car

If youd rather not sell your car, you can also trade it in at a dealership for a less pricy used vehicle. Try to go for a car with a value thats close to your loan balance.

But watch out for dealership financing: Itll often roll whats left of your old loan into the new one, which could land you with another upside-down car loan.

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Consider Getting Gap Insurance

Gap insurance helps cover the gap between your vehicle’s value and the outstanding balance on your loan in the event your vehicle is stolen or totaled in an accident.

Without gap insurance, your lender will typically require you to pay the difference. But if you have gap coverage, you can file a claim to have that provider pay off the deficiency amount.

Keep in mind, though, that gap coverage can come with several limitations and exclusions, so be sure to review the fine print carefully before buying a policy.

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How to Get Out of An Upside Down Car Loan

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Our Recommendations For Refinance Auto Loans

Auto refinancing can help you get a shorter loan term and a lower rate. When we conducted our industry-wide search for the best auto refinance rates for 2022, myAutoloan and Auto Approve stood out from others in the industry. We recommend reaching out to these trustworthy and reputable companies to see what options are available for refinancing your upside-down car loan.

Earn Extra Cash To Make Bigger Loan Payments

Aside from cash-back offers, there are also referral programs offered by auto brokers. Youll get paid every time a person you refer to the broker contracts with that firm. You can then use the money you earn to make extra payments for your own auto loan.

There are plenty of other ways to earn extra income, such as getting side gigs outside of your main job. This, in fact, has become quite the norm in the Great White North, with one in three Canadians having a side hustle.

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Options When You’re Upside

Figuring out where to go when your loan is suffering negatively can be a hair pulling experience. The good news is there are people available to help you today. Start now by completing our quick and easy online application to get in touch with our team of professionals that can get you on the right track today. Here are some options that you can consider:

  • Refinance to a Shorter Term This may be your best option. It means you would be making larger payments each month, but you could also end up lowering your interest rates too.
  • Roll-over Your Debt If you need to get a better vehicle soon, this is an option you can consider. Depending on your dealer and the vehicle you choose, you could end with comparable monthly payments that are more equal to your new car’s value. Keep in mind that what you owed on your last vehicle is part of what you’ll be paying though.
  • Negative Equity Trade-in While not the most desireable of options, a negative equity trade in can work for you if you are having trouble with your current vehicle and need a new one, but it still has some value to help offset the lost equity. This will cost you out of pocket, but better then having the full burden of paying for two vehicles at the same time.

S For Refinancing Your Upside

How to Get Out of an Upside Down Car Loan?

One of the best options for getting out of an upside-down car loan is refinancing your current loan. This can also help you lower your interest rate and monthly car payment.

Below, well provide in-depth information on the steps you need to take to get positive on your upside-down car loan and get auto loan refinancing.

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How Does A Car Loan Become Upside Down

A car loan can go upside down in several situations. Financing a new car over a long term is one common way especially if that term is longer than 60 months. Having a high interest rate, foregoing a down payment or buying a car thats out of your budget can also lead to an upside-down car loan. And rolling over a previous loan during a trade-in also puts your loan at risk of becoming upside down.

How You End Up With An Upside

There are a few common ways people become upside-down on their auto loans:

  • Financing a car with no money down. Vehicles can lose as much as 20 percent of their value in the first year of ownership. It wont take long for your vehicles depreciation to overtake your equity if you dont make a down payment or borrow too much money.
  • Picking a long repayment term. Some lenders offer new car financing for up to 84 months . This keeps monthly payments low, but your car will likely depreciate beyond your original purchase point by the end of that period.
  • Buying a luxury model. Luxury cars tend to depreciate much more quickly than their counterparts. Combined with their high cost, you are more likely to have negative equity if you choose to buy instead of lease.
  • Agreeing to a high interest rate. The higher your interest rate, the more interest youll pay the lender and the less that goes toward paying down the principal. And the longer it takes to pay down your principal, the higher your chances of being upside down.

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Little Or No Money Down

Costs outside of the price of the car, such as taxes, licensing, registration, and dealership fees, will add to the amount of financing required. Not putting any money down for a car may sound like a good deal, but doing so can cost you more over time.

Similarly, if you put a small down payment on a car, youll need to extend the financing later. In the simplest terms, no money down or a small down payment means youre more likely to wind up negative equity in the long run.

Dangers Of The New Car Urge

How to Get Out of an Upside Down Car Loan

In a market that pushes the newest, latest car designs, many people feel they have to get into a new car whatever it takes. Others simply dont feel comfortable driving a car that is out of warranty or has a lot of miles on the odometer. Whatever the reason, the fact remains that dealers and financial organizations are willing to accommodate these purchases by making deals that roll-over the debt owed from the trade-in and add it to the financing for the new car with, understandably, a higher loan amount over a longer period of time. This is done to keep the monthly payment low enough to be affordable.

What sometimes doesnt get noticed by the buyer is that he or she is now making payments on two cars the new one and what was left of the old one and taking a very long time to pay it all off.

Furthermore, when a buyer is described as being upside-down it is quite often not for just a few thousand dollars. Many buyers are upside-down by 10 or 20 thousand dollars, or even more and, at their current rates, it will be years before they are even.

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Calculate The Negative Equity

The first step to knocking out the negative equity is to find out how much there is. To do this, youll need to look up how much your car is worth and how much you owe on it. A quick way to find your cars value is to use a site like Kelley Blue Book or Edmunds. Both will offer several types of values for your car choose either the trade-in value or the private-sale value. Then find out how much you currently owe on your car and subtract.

For example, if your car is worth $8,000 but you owe $10,000 on your auto loan, youre upside down by $2,000.

To find out how much you owe on your vehicle, log in to your online account with the lender or call them and ask for the payoff, which is the amount of money it would take to pay off the current loan completely.

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