Reach Out To Your Lender
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.
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.
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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Do You Owe More On Your Auto Loan Than Your Car Is Worth
Going upside down or underwater on your auto loan happens when the market value of your vehicle is less than the amount you owe.
For example, say you still owe $30,000 on a car that youd like to sell or trade in, but the most youve been offered is $20,000. Thats $10,000 in negative equity youll have to deal with. But how?
Unfortunately, this stressful financial situation doesnt have a one-size-fits-all solution.
Car owners who are underwater may be torn between two undesirable options: making regular payments while potentially losing equity, or selling the car and eating the loss.
But those arent necessarily the only options. While repaying the full balance on your car loan may be inevitable, some ways of dealing with an upside-down car loan are better than others.
The wisest course of action may ultimately depend on your budget, your credit and the time frame in which youd ideally like to pay off the loan.
On that note, lets look at four steps that can help you determine the best option for dealing with your underwater loan.
Theres no single authoritative source when it comes to car valuation. We recommend checking more than one of the above resources to get a better idea of your cars actual value.
To determine the loan balance, you need to subtract the amount youve already paid toward the loan from the original total loan amount.
What Is An Upside Down Car Loan
When youre underwater on your car loan, it means the value of your car loan is greater than the actual value of your car. For example, if you have an auto loan for $12,000, and your car is only worth $9,000, youre upside down. That $3,000 difference is considered negative equity, and is what brings you underwater.
As previously stated, cars depreciate at an alarming rate, which can make catching up on your upside down loan difficult because as your cars value continues to plummet, youre stuck with expensive loan payments.
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Upside Down Car Loans
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In a Nutshell
A car loan is “upside down” or “underwater” when the borrower of the loan owes more than the vehicle is worth. This negative equity situation can cause financial problems if a car is stolen or needs repairs that insurance wonât cover. Borrowers have options to flip their loans “right side up” or get them out of their upside-down loan obligations.
Written byChiara King.
There are many things that can cause a car owner to owe more on a car than itâs worth. Common reasons include: bad sale terms at the time of purchase, loans that donât pay down the principal fast enough, and sudden repair expenses that the owner must pay out of pocket. A negative equity situation can cause big financial problems if your car is stolen, gets totaled, or needs repairs that your insurance and warranty wonât cover. Thankfully, if you are upside down on a car loan, there are strategies you can use to turn right side up or to get out of the loan completely.
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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.
Key Takeaways On How To Get Out Of An Upside Down Car Loan
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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When Being Upside Down Becomes A Problem
Being upside down on your car loan doesnt always require immediate attention. Sure, its not good news, especially if it means you overpaid. But as long as you got a fair deal on your loan, and you make your payments on time, the expense of your loan and the value of your car eventually even out, usually in no more than five years. The imbalance might only be temporary.
The trouble comes when you can no longer comfortably afford your monthly car payment, whether its due to unemployment or job loss, income reduction, or another major negative change in your overall financial situation. When youre upside down and cant cover your loan payment, youre in a tough financial place.
Ways To Avoid Being Upside Down
One way to avoid being upside down is to make a large down payment when purchasing your car loan. This will bring down the total loan amount and help keep you from being upside down.
Another trick is to make extra payments toward your loan so you can stay on top of your cars depreciation. You could also consider getting a shorter term on your auto loan and pay off the note faster. That will keep you ahead so that you can build equity and not get upside down.
We would love to discuss your options with you here at Focus Federal Credit Union. Inquire about a personal loan or gap insurance and let us help you get right side up again!
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Why Do Loans Flip Upside Down
Cars lose their value so quickly after purchase, especially during the first year of ownership. Because of this devaluation process, there are many circumstances that can lead to upside down auto loans.
You can become upside down on a new car loan right after you purchase the vehicle. For example, if you buy an overpriced vehicle, your new carâs value may already be quite close to your loanâs balance at the time of purchase. The same is true if your down payment isnât large enough. To avoid these situations, you should look for a car that is a good value and is priced low enough for you to make a significant down payment as compared to the remainder of the loan balance. You should also avoid rolling over your negative equity into a loan for a new car, which can render you immediately underwater on the new vehicle.
Your loan can also flip upside down gradually if your car loan payments donât pay down your principal balance faster than your car loses its value. For example, the high monthly payments on an auto loan with a high interest rate will make it difficult to pay anything extra towards principal during the loan term. On the other hand, the low monthly payments on a long-term loan wonât reduce your principal quickly unless you make extra payments because the payments on these loans are spread out over a longer period of time.
How To Calculate Equity In An Auto Loan
Equity is the value of the ownership you have. In the case of your vehicle and auto loan, your equity is the amount of your cars value that you own. You can have positive or negative equity in the vehicle.
To calculate the equity in your auto loan, youll need to know the current value of your vehicle and the amount that you owe on your auto loan. When finding the vehicles value, do some research and check a few different sources to compare values. To determine the equity you hold, subtract the amount you owe from the current value. For example, if your car is worth $25,000 and you owe $18,000, then the total equity you have in your vehicle is $7,000.
When the total equity of your vehicle is a negative number then you have negative equity in your vehicle. If, in our example, your car is worth $25,000 and you still owe $30,000, then you have a negative equity of $5,000. This is how youll find yourself in an upside down auto loan. Its important to take the time to calculate the equity of your vehicle to see if you have positive or negative equity in the vehicle.
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Ways To Get Out Of An Upside
Above are ways that you can get out of your car loan if you have positive, or close to positive, equity. But if you have a negative equity if the market value of your car is less than your loan balance then your car loan becomes upside down. Paying off an upside-down loan can be more difficult, as simply selling your car may not be enough or even an option. If you have an upside-down car loan, here are some ways you can mitigate the damages.
Sell Your Car To Another Driver
Your first option is to sell your car to another driver. You can either use the money from the transaction to pay off your loan, or have the buyer legally take over your car loan. If youre trying to get the loan transferred, youll want to be clear about the terms, and run a credit check on your buyer. Not all buyers will be eligible to take over your loan. You can talk to your lender about what criteria a buyer would have to meet in order for the loan to be transferred.
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Upside Down On A Car Loan Heres What To Do
It is common knowledge among automotive salespeople that roughly two-thirds, more or less, of all new-car buyers who walk into a dealers showroom have a current car to trade in, and roughly two-thirds of those, more or less, owe more on that existing vehicle than its trade-in value.
If you owe more on something than its worth, in the terminology of the industry that is known as being upside-down, and it applies to roughly half of all new-car buyers. This didnt used to be so common, as there was a time when a prudent buyer tended to purchase a car and diligently pay it off. But, with incentives on the rise, low-interest, long-term loans dominating the financial landscape and increasing numbers of buyers over-extending themselves by seeking instant automotive gratification, more people are finding themselves in the situation of owing more on the vehicle loan than the car is worth.
What Causes Negative Equity On Your Loan
Depreciation is a key contributor to having negative equity in your vehicle. Your vehicle depreciates the moment you drive it off the lot, which means youre losing value right away. Other causes of negative equity could include a high interest rate on your car loan financing the car for too long in relation to its value at the time of purchase or rolling extra fees and add-ons into the loan at the time of purchase.
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Selling A Car With A Loan On It
Another option involves selling your financed car to a private individual or by trading it in at a car dealership. Depending on your financial situation and needs, one option may be more suitable than the other.
How To Sell A Car With A Loan On It?
Sell It Privately When money is tight and you just want to get rid of your car loan, selling it may be the best option. By selling your car, you can use the money from the sale to pay off the car loan.
However, since the lender will have a lien on your car even after you sell it , buyers may be hesitant to purchase the car from you. To alleviate some of the apprehension they may be feeling, you can tell the buyer they can come with you to the bank, so they may witness you paying off the car loan.
Trade It In If money is tight, but you still need a car, you can opt to trade-in your car for a cheaper option. The money you get from your trade-in can be used to pay off your old car loan and as a down payment for your new car loan.
Increase Your Payment Frequency
If you can, make more than one payment a month. This is a good way to decrease the discrepancy between the market value of your car and your car loan, by simply decreasing your loan. You dont have to pay the say amount on each extra payment you can pay as little as an extra $30 a month but increasing your payment frequency can decrease your loan balance, and help counter any negative effects your upside-down loan may have on your credit score.
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Is Your Car Loan Upside
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Without even knowing it, you may have put yourself in a financially precarious position: being upside-down on your car loan.
Maybe you bought a new car without making a down payment. Or perhaps you opted for low, easy monthly payments by stretching your loan to 72 or even 84 months.
However you got there, its time to get right-side up again and avoid serious problems in the future.