Upside Down Car Loan

Damien Frost - 2020-01-03T22:00:00.000Z

When you owe more than the actual worth of your vehicle, you have an upside-down car loan.

For instance, if you have an outstanding auto loan of $18,000 and the current resale value of your car is $10,000, you’re $8,000 upside-down on the loan.

This can be alarming given the vehicle’s value continuously depreciates with every mile you drive.

Eventually, you’ll find it harder to catch up on the outstanding balance.

In this scenario, a majority of the car owners will either keep making regular payments while increasing the negative equity every passing day.

Or, alternatively, they’ll sell the car and accept the loss.

So, how does one get into an upside-down car loan? Here are the common reasons:

You made a small or bare minimum down payment

A lot of dealerships accept low down payments.

While this can be a temporary relief, a lower down payment also means that the outstanding amount will be higher.

The auto loan has a high interest rate

If you’ve accepted a loan with a higher interest rate, chances are your monthly payments will be higher.

With higher installments, it can get difficult to manage payments, which can further lead to missed payments and an upside-down auto loan.

The car you financed was very costly

This is one of the most-common reasons for upside-down loans. Just because you’re financing the car doesn’t mean that you’ve to go beyond budget.

There is no denying the fact that you’ll have to repay the loan in full, but there are better ways of getting it done.

Keep reading to learn about different ways of recovering from an upside-down car loan.

Find Out The Total Negative Equity Of Your Car

The first step towards fixing any imbalance is to determine just how upside-down the loan is.

An easy way to figure this out is by deducting the estimated cost of the vehicle from the total outstanding balance.

According to the Federal Trade Commission (FTC), you can look at the Kelley Blue Book, Edmunds, and National Automobile Dealers Association Guides to know what your car is worth.

Unfortunately, there isn’t a definitive source for evaluating your car’s value.

For instance, if the car is worth $15,000 and you owe $20,000 in total, you’re $5,000 upside-down.

Once you’re able to figure out the negative equity, it gets easier to figure out the next steps.

Please be informed that you should try and cancel extra services or additional warranties as these are surefire ways to lose extra money.

Discuss The Available Options With Your Lender

Before you go about selling the car or seeking more debt, it is an ideal choice to speak with the lender and look for other alternatives, if any.

You can either call the lender or visit their office and discuss possible ways to pay off the negative equity in one shot or try negotiating a repayment schedule.

Even if the lender doesn’t agree to any alternative, it doesn’t hurt to try.

If you have some savings, you can use it to make extra payments in addition to the predetermined monthly installments.

Discuss with the lender if this is an acceptable person. Please be informed that most lenders have different requirements and may or may not agree to extra payments.

Apply For Refinancing

If you have a good credit score, a steady job, regular income, and a low debt-to-income ratio, applying for refinancing can help balance the negative equity.

This is only an option that you should consider if you’re able to access low rates and suitable repayment terms.

Based on the specifics of your original loan, refinancing will help save on the interest payable, or lower your monthly payment, or both.

You should apply for refinancing if:

Your credit score has improved recently
You are having a temporary financial crunch and need a lower monthly payment

However, beware that most lenders charge a variety of refinancing fees including a setup fee, processing fee, origination fee, and more.

The good news is that almost each of these lenders are ready to negotiate these fees.

To get an upper hand, we recommend that you search for lenders who are ready to waive off a portion or the complete fees.

Try Selling Your Car

If none of these options suit your financial needs, then the most straightforward way of turning this negative equity in your favor is putting your car up for sale.

You can sell it back to the dealership, but we recommend trying to sell it outside.

You can even list it on Craigslist or other similar sites.

Set up a rate that will help you cover the negative equity at least.

Factor in other expenses like documentation, title change, and miscellaneous expenses so you can get a fair deal for the vehicle.

The Bottom Line

An upside-down loan can be extremely stressful, but it isn’t a dead end.

Make sure you know the negative equity and plan accordingly from there.

We recommend that you compare all available offers and alternatives before listing the vehicle for sale.