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What To Do If Upside Down On Car Loan

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What to do If You’re Upside Down on Your Car Loan


Cars, whether theyre new or pre-owned are both a big responsibility and a big expense. There are many different costs to factor in, such as fuel, insurance, oil changes, repairs, tires, etc. Not only that, but youll need to consider other elements, like where youre buying the car from, what your warranty will cover, if any, and of course how youre planning to pay for the car in the first place. Depending on your current income and how expensive the car is, it can take years to finance completely, so its common for many would-be car owners to apply for a car loan.

A car loan, like any kind of loan, is a system that allows a buyer to pay off the total value of the car in monthly installments, making it more affordable. After all, very few people are going to be able to pay for a $25,000 car using a cheque.

However, when all the other car expenses are being considered, there are other factors that many people forget to take into account before applying for their loan, such as the cost of interest. They might be able to afford the loan payments initially, but something else might happen further down the road that makes paying more difficult. Loss of employment, decreased income and all manner of other financial emergencies might arise, making the car loan payments harder to afford. If this is the case, there are a couple of different ways of dealing with a car loan before it gets completely out of control.

Getting Upside Down On A Car Loan

To understand how to get out of trouble, you first need to understand how you got upside down on a car loan in the first place.

  • A car depreciates in value very quickly, especially in your first three years of owning it. When you buy a car with a low down payment or no down payment at all you immediately owe nearly the entire purchase price, but its already worth less. For example, if you buy a $20,000 car and only put a thousand dollars down, youll be upside down as soon as you drive the car off the lot. You owe $19,000, but the car is only worth $16,000.
  • Its easy to overpay if you dont do your research before buying a car. Your overpayment doesnt make the car worth any more in the fair market, so if you pay $24,000 for a car thats now worth $16,000 youre upside down and already facing a big problem.
  • Its not always your fault. When an unscrupulous car dealer takes advantage of you, you can end up owing more than you should.
  • When you add too many frivolous options to your car, you increase your final total, but not the value of the car. Thats a recipe for being upside down even faster.
  • If youre already upside down on one car loan and you try to get a new loan, dealers will often roll the shortfall from the old car to the new car without even telling you.

Keep Your Property And Pay Off The Loan

One option is to keep your car or home and continue paying down the loan. Unfortunately, that’s not always feasible. Expensive repairs can make a vehicle more trouble than it’s worth. Or you might need to relocate and sell your house for a variety of reasons.

When youre dealing with an upside-down car loan, it might make sense to use gap insurance to manage your risk.

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How Do You Get An Upside Down Car Loan

Now, youre probably asking yourself, How do you get an upside down car loan in the first place? There are a variety of scenarios in which you could find yourself with an upside down car loan. Knowing the potential causes of an upside down car loan may help you understand how to get out of an upside down car loan. Take a look below at some of the most common reasons you may find yourself underwater:

  • You bought a car that was too expensive: Distinguishing between our wants and needs can be tough. Especially when the latest luxury car, with its interior ambient lighting, Bluetooth surround sound speakers, and high-speed performance, hits the market. However, are all of those amenities necessary? Buying a car that is out of your price range is one way you may end up with an upside down car loan. Its important to never forget your other obligations, such as your student loans, mortgage, food, and other basic necessities.

When buying a car and taking out an auto loan, you may want to consider choosing an affordable car with a shorter loan. A report from the Consumer Financial Protection Bureau found that longer-term auto loans cost more than shorter-term auto loans, and those with longer-term auto loans exceeding six years are more likely to default.

How Does An Upside Down Car Loan Happen

How to Handle an Upside

An upside down car loan, also known as a negative equity car loan, is a loan where you owe more for your car than it is worth. You can get yourself into such a situation in a number of ways:

  • If you trade in a car that has a loan balance and add that balance onto your new auto loan, you will owe more for the new car than it is worth.
  • If you purchase a car with no money down, the car will depreciate much faster, leaving you with a negative equity. Remember, cars depreciate in value as much as 20 percent in the first year of ownership and can depreciate by 50 percent by the third year. If you bought your car with no money down, you are likely to owe more on it than it is worth for the five years that you have it.
  • Even with a decent amount of money down, if you opt for an extremely long-term loan to keep your car payments low, your negative equity is not likely to improve.
  • If you are in an accident and lack sufficient insurance coverage to fully cover any damage to your vehicle, your car will decrease in value drastically while your loan payment stays the same. This is why comprehensive, collision and uninsured/underinsured motorist coverage is so important and is usually required by lenders.

No matter how you got into your upside down car loan, the most important thing is to rectify it as quickly as possible. This will save you a lot of money in the long run.

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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.

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Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.

Our loans reporters and editors focus on the points consumers care about most the different types of lending options, the best rates, the best lenders, how to pay off debt and more so you can feel confident when investing your money.

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Why A Negative Equity Loan Happens

Another name for an upside down car loan is negative equity. This term means that instead of having equity in the car, or a portion of the car value that is already paid for and would return to the owner in case of a sale, the owner instead would owe the bank or lending institution money if the car were sold.

There are a variety of ways a buyer gets into a negative equity situation. The most common occurs when a person trades in an old car for a new one. Sometimes a car dealer acts unethically and doesn’t fully disclose terms in this situation, but other times it is the responsibility of the consumer, who doesn’t take the time to understand loan documents or buyer’s agreements.

A buyer often comes into a dealer with a car that is not paid off, but wants a new car. The dealer merely tells the buyer that they can arrange for a payment that is not much more or is no more than the current payment, without the buyer understanding that they are folding the loan on the old vehicle into the price of the new vehicle.

Another way a person gets into a negative equity situation is by purchasing a car with no money down. Cars depreciate 20% in the first year and 50% by the third year of ownership. They are not an investment, but rather, a liability. If you buy a new car with no money down, you are in a negative equity situation as soon as you drive off of the lot.

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.

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Ways To Get Out Of An Upside Down Car Loan

Theres nothing better than smelling that new car scent as you traverse down the backgrounds in your brand-new ride. But what most new car buyers dont know is that the moment you drive that new shiny car off the lot, it can lose up to 10 percent of its value after one month of driving, and up to 20 percent after a full year, according to a report by CarFax.

Soon, that new car smell will be replaced by the smell of burning money. If you dont budget correctly and finance your new car properly, you may find yourself in a potentially damaging financial situation where you end up with an upside down car loan.

If youre upside down on a car loan, or underwater, it means the value of your car loan is greater than your cars overall value. Being in a situation like this can be frustrating and stressful, especially if youre struggling to pay that loan off. If youre looking to get out of an upside down car loan, this article may come in handy. Well go over how to get out of an upside down car loan and answer other important questions, that can be reached using the jump links below.

Make As Many Payments As Possible

One more choice to escape from the negative equity position is to pay extra money each month toward the loan principal. This allows you to pay off the loan quicker and build equity at a faster rate. Before you do, check whether your loan agreement adds a fee if you pay it off early.

Another tactic would be to use savings money you might have been putting aside for a down payment on a future purchase to pay off your loan. The downside of that idea is that you no longer have money left for a down payment on your next car and not many banks want to make loans to consumers who have no down payment.

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Going Upside Down On An Auto Loan In Hamilton

Going upside down on an auto loan usually happens when you buy a new car. It can happen with used cars too if you dont have much of a down payment.

Its where the auto loan amount is more than the car is currently worth and is usually caused by depreciation.

For example, you buy a new car for $45,000, use $10,000 as a down payment and have a loan of $35,000. During the first year, the car will lose up to 35% of its value, so will be worth less than the $35,000 amount still outstanding.

Even though youre making payments, the rate of depreciation is faster than the rate youre paying the loan off. This results in negative equity, or going upside down.

Key Takeaways On How To Get Out Of An Upside Down Car Loan

Ways to Get Out of an Upside

Being underwater is never fun. If you have an upside down car loan, its important to act fast, so you dont fall further into debt. While your car begins to depreciate, your loan and its interest rate will still be there. From refinancing your car to selling it, these tips on how to get out of an upside down car loan will help you stay afloat and build equity in your vehicle.

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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.

Option #: Sell The Vehicle

If you really hate your vehicle, you can always sell it privately. The Facebook marketplace and Craigslist are full of people trying to sell any and all kinds of vehicles. Generally, private sellers can get more for a vehicle than a dealership is willing to pay. This is because the dealership has to clean the vehicle up and re-sell it for a profit. If your vehicle is valued between $6,800 and $11,000, the dealership will want to give you the lowest price they can so they can make a profit when they re-sell the vehicle. If you sell privately, there is no guarantee youll be able to get what youre asking for the car, but you can set your own price instead of waiting for an offer. The danger with this route is that you are still responsible for whatever you still owe on the vehicle. If youre upside-down on your auto loan, you arent going to be able to sell the car for what you owe. If, for instance, your loan payoff is $14,357 and you sell the car for $9,000, you are still responsible for the remaining $5,357 on the loan. You can either pay that out of pocket OR you have to continue making payments until the full amount is paid.

Option #3: Trade-in your car at a dealership

Option #4: Refinance for a lower interest rate and payment

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What Should I Do

In an upside down car loan situation, there are a couple of ways that one can combat such a troubling situation. The best thing to do is to keep the car and pay the car loan down as quickly as possible. Don’t buy a new vehicle, because any dealer who would help you buy a new vehicle when you are already upside down is only going to make your situation worse.

Another option is to sell the car. If you sell the car and don’t have to buy a new one right away, you can use the amount you get from a sale to pay down the loan, and then work for the next several months until you pay off the difference. Just because you sell the car does not mean the bank will forgive the difference.

Some lending institutions will call the entire loan due at the sale of the vehicle, so you would need to work with your lender to turn the loan into a personal or signature loan. However, they will only do this for people with excellent credit.

Some people recommend turning in a car when you are upside down on a leased vehicle. This may relieve the immediate pressure, but has the same end result. When the lease is up, you will still have negative equity unless you have made substantial extra payments.

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