Best Ways To Get Out Of A Car Loan
Now that you know what a total waste car payments are, lets talk about how to get you out of that car loan. Basically, youve got two options: Pay off the loan or sell the car. Which one should you do? Well, that comes down to how you answer two questions:
1. Can you be debt-free within two years and keep the car?
If yes, pay off the loan. If not, sell it.
2. Is the total value of all your vehicles more than half of your annual income?
If yes, sell it. If not, pay off the loan.
Thats the quick answer, but lets break down how each option plays out.
How To Get Out Of An Underwater Mortgage
The sooner you find out that youre underwater on your mortgage, the better. This will give you time to take steps to get yourself out of this situation.
Option 1 . Refinance Your Mortgage
Refinancing involves replacing your current mortgage with a new one on different terms. But to qualify, youll likely need to have some equity in your home first, as lenders typically dont allow mortgage refinancing on an underwater loan.
Rather than parting with your mortgage, youd be better off making payments on your loan until you build enough positive equity to refinance.
Option 2. Stay In Your Home
Consider whether or not you think property values will increase in the near future. In this case, you may be able to build some home equity over the next little while as the value of your home appreciates. Even the slightest increase in home values can make a big difference.
Also, think about your income and whether or not you think youll be able to financially contribute to making up lost ground in terms of property value versus your outstanding loan balance. If your income increases in the near future, you may be in a better position to pay your home loan faster and get yourself out of an underwater situation.
Option 3. Sell Your House
Option 4. Sell Through A Short Sale
Option 5. Ask Your Lender For Help
Option 6. Deed-in-Lieu Of Foreclosure
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Trade In The Car To Rid Yourself Of The Loan
If you dont see a way out to keep up with your hefty monthly installments, then a suitable option could be to sell the car and get another economical vehicle to afford and fit your budget. You can use the remainder received to reimburse the remaining loan balance.
Most car loans are underwater, which implies you have to pay more on a loan acquired than the cars value, indicating negative equity. It is common when individuals are buying brand new expensive cars due to depreciation.
You would still be required to settle the difference to get rid of the loan when selling the car with an underwater loan.
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What Does It Mean To Be Underwater On A Car Loan
The car loan world can be a confusing place, and when terms like underwater car loan are tossed around, everyone assumes that you know what they are talking about. It might not come as a surprise to you, but an underwater car loan has nothing to do with a flooded car. Being underwater on your car loan means that you owe more on the loan than what the car is worth. In this day and age, it is not hard at all to get yourself into this unfortunate situation. Determining whether or not your loan is underwater is, unfortunately, easier than fixing the situation, but its an important first step:
Look Up the Value of Your Car: Finding the value of your car is not as difficult as you might think. Start by going to a website that offers the service, such as Kelley Blue Book, Edmunds, or Auto Trader. All are reputable sites that are very capable of providing the information you seek. You will just need to input your year, make, model, mileage, wear, and any special features, as well as your location, and youll be able to see both the expected trade-in value and the price you should be willing to pay if you buy the vehicle from a dealer.
How to Avoid Being Underwater on a Car Loan:
·Choose an auto loan term which is 48 months or less. The longer your auto loan, the longer it will take you to get ahead of the game, and the more you will pay in interest payments over the lifetime of the loan.
What To Do If You Can’t Afford Your Car Loan Payments
During the financing process, it’s important to consider your budget to make sure you can afford the vehicle you’re buying. But financial situations can change and you may now be finding it difficult to stay on track.
If you’re having a hard time making your monthly payments, here are some potential ways out.
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Your Current Finance Company
It’s worth calling the company who owns your current auto loan to see if you’re eligible to refinance your current car loan for a lower interest rate. Paying less in interest will help you to bridge the gap between what you owe and what the car is worth on the market. In some cases, the company may allow you to extend the loan terms for an additional year which would lower your payment as well. Negotiating the terms to that happy place where you’d be paying more on your principle than you are in interest will help mitigate the upside down loan effect.
Other Ways To Manage Your Upside Down Car Loan
One thing that you can do to manage your loan is to include extra money with each monthly payment. If the money you owe to the bank for your car is far more than what it’s worth, you should do your best to pay an extra $50 to $100 each month, or more if you can afford it. This can really make a big difference and it will help lower the negative equity a lot quicker.
You should also consider getting gap insurance for the car. If you get into an accident and the car is totaled by the insurance company, you are going to be expected to pay the difference in value on your own. The insurance company is only going to pay the loan company what they think the car is actually worth, not the amount of money that is actually owed on the car. If you have gap insurance, they will pay the difference. This can save a significant amount of money in a bad situation.
One reasonable thing to do is simply keep your car and pay the negative auto loan off. Many people are often tempted to stick with new cars they can use as trade in leverage, but with an upside down loan, it really is not a very good idea. If you do this, the lender will take the negative equity you have on your trade in and tack it onto the price of your new car. Then you will be practically back in the same spot you originally found yourself in with your new car.
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Pay Ahead Of Schedule
Another way to build equity and reach the surface rather than being trapped underwater is by paying your loan ahead of schedule with extra payments. This doesnt mean every paycheck you earn should go towards your auto loan. All it means is putting any extra cash you have, whether 25 dollars or 300 dollars, towards your auto loan. This tactic will help you get right side up, slowly but surely. However, you should make sure you read the fine print of your loan agreement. Some lenders may add a fee if you decide to pay your loan off early.
Opt For A Shorter Loan Term
While the average new car loan term is now about 70 months, according to Experian, choosing a shorter term will reduce the amount of interest you pay. With a longer-term loan, you pay less toward the principal each month. That leaves a bigger balance that may exceed the value of the car. Its a good idea to finance the car for only as long as you intend to keep it.
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Using A Car With Negative Equity As Trade
You can fill in the rest of that ad with the name of just about any car and just about any dealership in the U.S. and the promise will be as empty as your bank account because it promises negative equity.
The ad plays on every station in every market in America and you have to admit its enticing enough to make you stop and think about doing it. Someone else bails you out of a bad loan situation and puts you into a new car with no out-of-pocket expense. Whats not to like about that?
Heres a word of advice from car-buying experts: DONT EVEN CONSIDER IT!
Trading in a car with negative equity to take on another car loan with even more negative equity is like throwing gas on a fire because its the only liquid you had handy. You just increased the chances for a serious financial meltdown and here is an example of why.
Lets say you owe still owe $10,000 on a car that is only worth $5,000. The dealer will pay off the $5,000 difference, but then roll that amount into the loan on your next car. So, if you needed to borrow $20,000 for the new car, the dealer rolls another $5,000 into the loan to cover the cost of paying off your previous loan and now youre borrowing $25,000.
Not only will your monthly payments be higher , but you likely will be paying higher interest on the loan.
And, dont forget, youre going to add more negative equity to your situation when you calculate the 20% depreciation in value the new car will lose when you drive it off the lot.
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Defaulting On The Borrowed Loan
The worst option to get out of a car loan defy it. When you stop paying your monthly installments or underpay them, it will result in a default. Defaulting a loan could damage your credit score for almost a decade and lead to a possible repossession.
Defaulting on a loan and ultimately losing on to the car is an option few people ever choose. Its usually for debtors who cannot sustain obligations that come with the loan.
The smart move would be to set up a meeting with the lender to talk about your financial circumstances. The lender may be eager to draft a payment structure and plan or find an alternative solution that stops you from defaulting.
Moneylenders usually dont want borrowers to default. Instead, they prefer to guide you and figure out a way to make your payments.
Changing Your Repayment Strategy
If you want to keep both your car and current auto loan but just want to get rid of the negative equity, you have a few options for paying the loan differently. Depending on what you can afford and how quickly you want to stop being underwater, you might either make larger monthly payments, increase the frequency of payments or make a lump-sum payment toward the loan.
Similar to how you would with refinancing, you could just pay the underwater amount at once and then make your loan payments as usual. However, you should keep an eye on your car’s value and loan balance to make sure you don’t get underwater again. If you can’t afford to do this, check with your lender to see about making principal-only payments to help lower the principal plus reduce interest paid and work toward cutting down your loan. This could mean paying an extra $100 a month or even paying two car payments a month, but beware of any prepayment penalty that applies.
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Determine If You Have An Upside
Being upside down in a car loan is becoming more common, as cars become more expensive and loan terms get longer. In April 2020, the share of new car sales with a trade-in involving negative equity hit 44%, and the average amount of negative equity reached $5,571, according to Edmunds. The average cost of a new car has risen to $39,000, making it more likely people will take long-term loans up to 84 months or more, said Ivan Drury, senior manager of insights at Edmunds.com. Here are three steps to figure out if youre underwater on your car loan, and if so, by how much.
Can You Get Out Of A Car Loan
Yes, you can get out of a car loan in a number of ways. You can either choose to:
- Transfer the loan
- Give back the car
- Refinance it
But firstly, its good to understand one of the main reasons why a borrower will try to get out of their car loan the upside-down car loan.
What Is An Upside-Down Car Loan?
An upside-down car loan, sometimes referred to as underwater, means that the borrower owes more on their car loan than the car is worth, resulting in a position of negative equity.
This can often happen with newer vehicles because their value will depreciate significantly right after theyre driven off the dealership lot. As the years roll by, the car market fluctuates and the cars value goes along with it.
This is a problematic occurrence with pricier, luxury models in particular. A buyer will jump at the chance of the seemingly low monthly finance payments, failing to consider what it will actually cost them in the long run.
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How To Get Out Of An Upside Down Car Loan
The only real way to fix the problem of being upside down is by paying down the excess debt. Youll have to go through a few steps and make some sacrifices to manage the loan or raise the cash, but the process is worth your time. You can get out from under a payment you can no longer afford.
1. Refinance if PossibleOften times you will be unable to refinance a car loan when you are underwater but it will depend on the lender. Occasionally a lender will allow you to refinance depending on your loan-to-value ratio. Refinancing isnt going to reduce the amount you owe on the car but it will lower your rate, helping you pay more toward the principal balance.
Before looking into other options, check and see if refinancing would be an option for you. Before you get started, make sure you understand your credit score. You can check it for free through . The higher your credit score, the better your loan rates will be. Next, look into myAutoloan.com. They will give you up to four auto loan refinance quotes in just minutes.
2. Move the Excess Car Debt to a Credit LineAlthough many people would rail against using credit cards, moving the debt to a credit line might be the best option. If youre having trouble with a $600 monthly payment, moving to a more manageable rate on a $5,000 line can save you cash and buy you some time.
Discuss With Your Lender Before Deciding
When youre having financial difficulty and are not sure if youll be able to afford your car loan, the stress of it all can cause you to make rash decisions. However, the best thing you can do is to stay calm and get ahead of the situation by discussing it with your lender. Since your lender will likely not want to go through the motions of repossessing the car or having you transfer the loan to another borrower, they will be open to negotiating a solution to the problem. Overall, what they want more than anything is to be repaid in full, even if it takes fewer or more years than was originally planned.
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Voluntarily Surrender The Vehicle
If you’ve defaulted on your auto loan, the lender may choose to repossess the car. The process isn’t pleasant, and it can wreck your credit score. If you want to avoid repossession, but you have no other options, you can voluntarily surrender the vehicle to your lender.
A voluntary surrender allows you to return the vehicle to your lender on your terms, and while it can damage your credit, it won’t have as big an impact as a repossession. You’ll also be able to avoid certain repossession-related costs, which lenders may choose to add to what you owe. If you feel as though this is your only option to avoid a repo, contact your lender to set up a time and a place for the vehicle to be turned in.