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How to Get Out of an Upside-Down Car Loan
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It can be stressful to deal with an upside-down car loan, but there is light at the end of the tunnel. You could pay off the negative equity over time or in a lump sum, refinance or trade in your vehicle. The solution you choose will depend on whether you want to keep the car or your capital assets, and how soon you need to be right-side up.
How to get out of an upside-down car loan
1. Calculate the negative equity
The first step to knocking out the negative equity is to find out how much there is. To do this, you’ll need to look up how much your car is worth and how much you owe on it. A quick way to find your car’s value is to use a site like Kelley Blue Book (KBB) or Edmunds. Both will offer several types of values for your car — choose either the trade-in value or the private-sale value. Then find out how much you currently owe on your car and subtract.
For example, if your car is worth $8,000 but you owe $10,000 on your auto loan, you’re upside down by $2,000.
To find out how much you owe on your vehicle, log in to your online account with the lender or call them and ask for the payoff, which is the amount of money it would take to pay off the current loan completely.
2. Contact your lender
See if the lender may charge you any early payoff fees (which could also apply if you refinanced) and if they have any options to help you fight the negative equity. They may allow you to make automatic payments to the principal or make payments every two weeks. Both options may help more of your money to go toward reducing the principal of the loan, thus cutting down negative equity and helping you pay off the loan faster.
3. Look at refinance rates
Refinancing could help you get a lower auto loan APR. The less you pay in interest, the faster you can pay off the negative equity. A shorter loan term can help you qualify for a lower rate and cause you to pay off the loan even more quickly, speeding up the time to get right-side up again on your car loan.
4. Make a plan
Many situations are different, so find a method or two that are best for you. Your timeline, the amount of negative equity you have and the goal you have for your vehicle are important.
If you have some time and want to keep the car, saving up a down payment and refinancing it at a lower APR would allow you to pay down the principal faster and shrink your negative equity.
Pay it off in a lump sum
If you could pay off your negative equity right now without stressing your finances, this might be the best option. Make sure that doing so won’t clean out your savings account — we recommend having some savings on hand in case of an emergency.
Pay it off over time
If paying off the car’s negative equity in one fell swoop isn’t on the table, pay a little more each month toward the principal. For example, if your monthly car payment is $351, round up to $400 each month, with $49 going toward the principal. The more you can pay, the faster you’ll get rid of the negative equity. Here are 11 hacks to pay off your car loan faster.
Sell it privately
If you’d like to get rid of the car, consider selling it to another person rather than to a dealership. You’re more likely to get more money for it. You can post the car for sale on Craigslist, eBay Facebook Marketplace and/or other sites. Ideally, you sell it for enough to wipe out your car debt, including the negative equity. If that’s not possible, you’ll need to come up with the difference out of pocket.
Trade it in
We typically do not recommend trading in your car when it has negative equity. By doing this, you can immediately have negative equity on your new car, potentially triggering a bad cycle of debt.
But if you need to replace the car as soon as possible, trading it in and then using other methods to pay off the negative equity — or the entire car loan — may be your best option. You can also try to find a car priced sufficiently below its value to make up for your negative equity. For example, if you find a used car priced $2,000 below what it’s worth and you have $2,000 in negative equity, then you would not be upside down on your new car loan.
Cancel any add-ons
If possible, cancel any add-ons, such as extended warranties and service contracts. Any prorated refund should either be sent to you as a check (which you can then use to pay down your auto loan) or directly applied to the amount you owe on the loan.
How upside-down car loans happen
Overpriced vehicles: If you pay more for the car than what it’s worth, you’re in danger of being upside down on the car loan. Compare car prices from different sellers to find the best deal.
No money down: If you don’t put money down on a car, you end up financing not only the price of the vehicle but also the taxes, licensing, registration and dealership fees, which can make your amount financed larger than the value of the vehicle.
Long-term loans: Long-term car loans can spread out payments so much that a car loses its value faster than you can pay down the loan. And the longer the loan term, the more you pay in interest. We recommend getting as short of a loan term as you’re comfortable with.
Unnecessary add-ons: Dealerships can employ high-pressure sales tactics because they can make a lot of money by selling add-ons, such as appearance packages, extended warranties and more. Buying these means you have less money to put toward the car.
How to avoid an upside-down car loan
These are some ways you can avoid going underwater on your next auto loan.
Get a short-loan auto term: The shorter the loan term, the less you’ll pay in interest over time — and the quicker you’ll pay it off.
Choose a car that holds its value: Some cars are far more dependable than others. Research vehicle reliability ratings or cars with high resale value. Toyota models typically rank well.
Don’t get add-ons: Consider forgoing add-ons. If you really need or want an add-on, shop around to compare prices before buying. Local car shops or your auto insurance provider may have better deals.
Make a down payment: You don’t have to put down a huge sum. Even a few hundred dollars can fend off negative equity and help you stay right-side up.
Buy used: A new car loses about 20% of its value during its first year of use. Buying a car that’s only a year or two old can save you a lot of money due to depreciation.
Get preapproved: One of the best ways to make sure you get your lowest APR is to get preapproved for an auto loan. Apply to a few lenders so you can see some APRs for which you’d qualify. If the dealership says it can only offer you a high APR, tell them you already have an auto loan preapproval with a lower APR.
It doesn’t hurt your credit score if you apply to multiple lenders within at least a 14-day window any more than it would if you applied to one lender, so don’t be afraid to shop around for your best loan.