Local Banks And Credit Unions
Unlike larger banks and finance companies, a local bank or credit union is more flexible in working with customers to creatively refinance your current loan. Often they have limits as to how much they can loan, however they may be able to help extend a line of credit at a lower interest rate or offer home equity loans to help pay down the gap in what you owe and what they can finance. Credit unions in general, have competitive car refinance rates and often have promotions for refinancing new loans for automobiles.
Prevent Upside Down Car Loans From Happening Again
Once you have managed to clear up your problems with your upside car loan, do what you can to keep yourself from ending up in the same situation again. Try to avoid buying new cars unless you have the funds available to put at least 20 percent down. Also, keep your vehicles well insured with auto coverage and avoid buying more car than you can reasonably afford.
The Dealer Is Not Your Friend
Whatever you do, avoid the temptation to throw yourself on the dealers mercy. Chances are, theyll roll the negative equity into a new loan and youll be in worse shape than before. Instead, take control of the situation yourself and do whats right for you now and in the long run.
About the author:Philip Reed is an automotive expert who writes a syndicated column forNerdWallet that has been carried by USA Today, Yahoo Finance and others. He is the author of 10 books.Read more
Buying New May Not Be The Best Option
If you’re thinking of buying a new car, you have to realize that it will lose value as soon as you drive it off the dealer’s lot. Once you hit the street, that car or truck technically becomes used, and it’s no longer priced like something that is bright, shiny and new. The speed at which vehicles lose value is greatest in the first year of ownership, where the average new car loses 23% of its value in just the first 12 months. So, if you want to avoid steep depreciation, a new car may not be the best choice for you.
Solution #: File For Bankruptcy
This option is a last resort that you should consider only if you are struggling with overwhelming debt in all areas. If you are spiraling deeper into debt each month and can find no way out, bankruptcy may be your only solution. If you’re court-approved for Chapter 7 bankruptcy, you may be able to eliminate you car debt. If you file for Chapter 13, you may be able to renegotiate you car loan to something more affordable.
- Pros: Bankruptcy will enable to you to climb out of the red.
- Cons: This will leave you with extremely poor credit and can make it impossible to buy a new car for years to come. During this time, you may be limited to purchasing only used cars that you finance at extremely high interest rates.
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Option #: Continue Making Your Payments
This is the most obvious option. If you find out youre under water on your loan, take a deep breath and pat yourself on the back knowing is half the battle. As soon as you see what is owed on the car, how long you have left on your loan and learn your , you can work toward making your negative equity turn into positive equity. Where negative equity is the difference between the value of your car and what you owe on it, positive equity is only what is owed on the vehicle. Your loan payment is designed to pay off the full loan amount in the allotted time assuming every payment is made for the full term of the loan. You can achieve positive equity by making larger payments each month. A large portion of payments go toward the interest on the loan as opposed to the principle balance. If you are able to make larger payments each month, the interest will be paid off quickly and you will begin to pay off the principal value. This will help pay off the loan quicker which helps prevent going upside down on the loan in the first place as well as helping you get back into the green faster.
This option is the safest. It doesnt put you in a worse position than you were in before. This can also be beneficial for building credit. Youve already structured your finances with your current vehicle payment in mind and you wont have to worry about losing anything in the interim. This can also help you plan ahead and be ready when you do decide to get a new vehicle.
Tips For Avoiding An Upside
Its best to avoid an upside-down car loan altogether whenever possible. Be diligent with research before you buy a car and understand all the costs of options, financing and taxes so you arent already upside down when you drive out the door.
For most people, that means accepting that you cant afford to purchase a new car. Instead, look for a late-model used car with low mileage. The original owner will have paid the price for depreciation in the first year, so the purchase price should be at least 20% off the original cost.
If you are still tempted to buy new, try using the 20-4-10 rule, which means 20% down payment no more than 4-year loan and the monthly car payment plus insurance cant be more than 10% of your gross income. If you cant make those numbers work, its time to go back to the used-car lot.
The following tips can help you avoid an upside-down auto loan:
Choose the shortest repayment plan you can afford. Shorter repayment plans mean lower interest rates and faster payoff. For example, borrowing $25,000 for three years at 6.93 interest would result in $2,764 in interest paid. The same deal over four years would cost $3,716 in interest and a five-year loan would be $4,715 in interest. Thats about $1,000 more each year for the same loan. The difference would be magnified even more if your credit score was under 650.
Make a down payment of at least 20% of the cars total cost. This equals the 20% depreciation on the car that happens when you leave the lot.
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When Should You Refinance Your Car Loan
Refinancing an auto loan makes sense in many conditions. You should consider applying for a refinance loan if:
- Youve improved your credit score from when you originally financed the vehicle
- Your current interest rate is above todays average rates
- Youre unhappy for any reason with your current lender
- You want to lower your monthly payment by reducing your APR or lengthening your repayment period
- You want to borrow money via cash-out refinancing
- You owe $7,500 or more on your current loan
Refinancing your loan may not make sense if youve paid off most of your existing loan, or if your vehicle is older and has a lot of miles on it. You may also have trouble refinancing if you owe more than what your car is worth, as we explain in the next question.
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.
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What’s Fueling The Uptick In Upside
Car prices increasing faster than household incomes has pushed the average new car loan above $30,000 according to Experian’s most recent State of the Automotive Finance Report. At today’s prices, the cash down payment borrowers make is often not enough cushion to offset the decline in value of a car. A new car typically loses about 20% of its value in the first year almost twice as much as the average down payment these days, according to Edmunds.
Meanwhile, to make monthly payments more affordable, many borrowers are choosing long loans. While 72-months remains the most common loan termand now represents nearly 24% of the market vs. just over 10% in 2008more new loans have spilled into the 85-to 96-month length, according to Experian. The longer you take to pay back a loan, the longer it takes to build up equity.
You can get a quick estimate of whether you are upside down by checking Kelly Blue Book for the estimated value of your car, and compare it to the remaining balance on your car loan.
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.
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How Do You Get Out Of An Upside
Start by figuring out how much you owe on your car. To calculate this figure, subtract your car’s value from your outstanding loan balance. The Federal Trade commission recommends looking at National Automobile Dealers Association Guides, Edmunds, and Kelley Blue Book to estimate what your car is currently worth.
Then, you may consider refinancing your car loan. You could be eligible for a lower rate and a shorter repayment term length when you refinance, which would shorten the amount of time it takes to get you out of negative equity on your loan.
If you have enough money, you might want to pay off your negative equity in a singular lump sum payment though check with your lender to make sure you won’t incur any early payment penalties. You probably don’t want to completely drain your bank account to do this, though, as you’ll want to have money on hand in case of emergencies.
You could also contribute more per month by rounding up your payments to the nearest $50, for example. You’ll pay off your loan and get rid of your negative equity more quickly.
Read more of our tips to pay off your car loan faster.
Selling your car privately via marketplaces like Craigslist or Ebay is another option to consider. You should try to get enough for the car to clear your negative equity, otherwise you’ll have to pay that money back yourself.
Auto Loan Refinance Upside Down
Nicholas Hinrichsen Published: January 15, 2022
- Check if you bought GAP insurance or a Service contract. Often you can cancel these contracts which removes them from the loan
- If youre still negative equity you can potentially get 2 loans such that you payoff 80% of your loan with an auto refinance loan at a lower interest rate, and then also receive a personal loan to make up the remaining balance. Your combined payment can still be lower than your existing loan
- Your last option is to wait a little bit and make bigger payments each month on your current loan to get to positive equity. If you make an additional $50 payment monthly, that money goes directly towards the principal in the loan. This helps you get to positive equity sooner
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An Upside Down Car Loan Often Results From Low Down Payments Long Payment Terms And Other Factors Learn How To Manage It
An upside down car loan is much more common than most people realize. The nature of car purchasing, depreciation and sales tactics at dealerships often lead to people who are upside down in a car loan, meaning they own more money on the loan that the vehicle is worth.
How To Avoid Going Upside Down On A Car Loan Next Time
Here are a few strategies to help you avoid negative equity on your next car loan:
- Buy a used car. Used cars depreciate at a much slower rate than new cars a new car can drop up to 20% in value the minute you drive it off the lot.
- Opt for a lease instead. When you lease a car, youre essentially renting the car for a few years, so the cars value isnt your responsibility.
- Make a sizable down payment. Putting at least 20% down when you buy a car reduces the amount of financing you need, lowering the likelihood of your car loan becoming upside down.
- Go for a shorter term. A short term on a car loan means your repayments can better keep up with your cars rate of depreciation while also helping you save on interest.
- Get gap insurance. Unlike standard car insurance policies, gap insurance covers the difference between what your car is worth and the amount you owe on it should you get into an accident while you still owe money on your car.
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Getting Your Car Loan Right
Being upside down on your auto loan isnt always the easiest situation to get out of, but it certainly is possible. With a little research and a plan, you can take the necessary steps to not only keep your car, but also save your credit and bank account.
Ready to refinance your car loan?
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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.
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What Does Upside Down On A Car Loan Mean
I visited my bank the other day to refinance my car loan, but they denied my application and told me itâs because Iâm upside down on my car loan. I donât understand. Whatâs an upside-down loan?
you have negative equityremaining loan balance is greater than the current value of the carshop aroundapply multiple placesincrease your chances of being approved
- Local banks
turn the loan around
- Making your payments as planned and waiting to refinance until you have positive equity
- Making extra payments to achieve positive equity sooner
- Paying the difference between what you owe and what the vehicle is worth
saves $879 a year
Alternatives To Fixing A Bad Deal At The Dealership
If you dont want to refinance, there are a few other options to consider.
Trade-in your car: If youre going this route, go for a less expensive vehicle. This downgrade will help reduce your overall auto debt.
Sell your car, private party: This may require more effort and time on your part, as there are a few more steps involved when selling your vehicle without your title , including:
- Asking your lender for the payoff balance
- Obtaining the value of your caryou can do this through Kelly Blue Book or Edmunds
- Paying off the vehicle so the lender can release the title to the new owner
Theres a possibility that you may also end up upside down on your loan, which means your cars value is less than your loans payoff amount. For example, if your car is worth $20,000 but you still owe $25,000 on the loan, you may have a tough time finding a private buyer who would be willing to pay you $25,000 for the vehicle.
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