Upside-Down Car Loans: 7 Ways to Get Out of an Upside Down Car Loan Fast
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It’s easy to have an upside-down car loan, meaning you owe more money on your vehicle than it’s worth. A new car can drop 20% of its value in its first year, so you might be surprised to find you have negative equity when you go to trade in the vehicle. Fortunately, there are many ways to get out of a car loan.
Find out how upside down you are on your auto loan
If your car is worth $8,000 but you owe $10,000 on your auto loan, you’re upside down by $2,000. It’s also called being underwater, while the amount is called negative equity. To calculate your negative equity, you need to figure out:
- What you owe
- How much your car is worth
If you’re shopping for a new car and a dealer tells you how much negative equity you have in your current vehicle, do your own research to find out if the number is accurate. A car dealer usually isn’t your friend — dealers could inflate your negative equity by offering you much less than what the car is worth.
See how much you owe on you car
Call your lender to determine your car’s payoff amount or log in to your online account to confirm the amount. The lender may offer what’s called a 10-day payoff, which just means that the amount it quotes you on how much you owe is good for 10 days. After 10 days, the amount will have changed slightly.
Determine what your car is worth
Use a free online industry guide that dealers and lenders themselves reference. Plug in your car’s make, model and year, along with its mileage, trim and condition to see what it’s worth. The three most popular industry guides are:
Each guide should give you about the same values for what your car is worth, depending on how you could decide to sell it: by trading it in or selling it to a private person yourself.
Pick 1 of 7 tactics on how to get out of a car loan
Here are seven things you can do — individually or combined — to get out of an upside-down car loan, whether you want to keep your current car or get rid of it.
How to get out of a car loan and get rid of the car
1. Trade it in. This is only advised if you find a car that is priced sufficiently below its value to make up for your negative equity. For example, if you find a used car that is priced $2,000 below what KBB or NADAguides say it’s worth and you have $2,000 in negative equity, then it makes up for the difference and you should not be upside down on your new car loan.
2. Sell it privately. You’re more likely to get more money for your car by selling it privately than you if you trade it in to a dealership. You could post the car for sale on eBay, Craigslist, Facebook Marketplace and other sites. The ideal situation is if you can sell the car for enough to cover what you owe on it. If that’s not possible, you could put the money from selling it toward the loan immediately and then continue to make payments on what’s left.
How to get out of a car loan and keep the car
3. Refinance. If you have a high interest rate and your credit has improved since you signed for the auto loan, you may be able to get a better rate through refinancing. If you got your car loan from a “buy-here, pay-here” establishment — these establishments are known for predatory lending practices — definitely consider shopping around for refinance options. Look for some of the best auto refinance companies.
4. Pay it off. This is also called “riding it out.” By paying off the auto loan as scheduled, you won’t owe anything on the car and therefore there won’t be a difference between what you owe and what the car is worth.
5. Make extra payments. You don’t have to double your car payment — you can simply put extra money that you have toward the car, whether it’s $50 or $200 at a time. When you make these payments, write on the check or tell the lender that the payment should go toward the principal, not the interest. Many lenders don’t penalize you for paying off auto loans early, but you should still look at your paperwork or call the lender or dealer to double-check that you won’t owe a fee.
6. Make payments every two weeks. Another way to make an extra payment without feeling like you’re forking over extra money is to make half a payment every two weeks instead of one payment each month. Over the course of a year, this means you’re making an extra payment without too much pain. Again, be sure that you won’t run into a prepayment penalty.
7. Cancel any add-ons. If possible, cancel any loan add-ons. You should be able cancel intangible add-ons such as GAP, extended warranties and service contracts, all of which are services offered over time. 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 to choose the best tactic for you
Your timeline, the amount of negative equity you have and the goal you have for your vehicle are important.
- 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.
- 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.
Many situations are different, so find a method or two that are best for you.
How to avoid an upside-down car loan
One of the best ways to get out of an upside-down car loan is to not get in one in the first place, but that’s not always possible. These are some ways you can avoid going underwater on your auto loan — and if you still do go underwater, these methods might help you from going very deep.
Make a down payment
You don’t have to put down a huge sum. Even a few hundred dollars could fend off negative equity and help you stay right-side up.
New car values drop like a rock during their first year of use. Buying a car that’s only a year or two old can save you a lot of money and prevent you from becoming upside down on your car loan due to depreciation.
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 it 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 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.
Don’t miss payments
When you miss payments, you have to pay interest on the interest you should have paid. Double interest clearly isn’t good.
Don’t get add-ons
If you can’t buy add-ons with cash, consider forgoing them. If you really need or want an add-on, look for other places you can buy them. For example, dealerships like to sell appearance packages for thousands of dollars. A component in an appearance package is paint sealant, which you could buy on Amazon for around $20.
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 depreciate faster than others. There is little sense in paying a lot of money for a car that will only be worth half of what you paid in a couple years. You could Google the car model you’re interested in — along with the phrase “depreciation rate” or “how does it hold value” — to find out.
Cover the taxes and fees out of pocket
Pay for the taxes and the fees upfront instead of financing them into your auto loan. The idea behind this is to not finance anything but the car so that your loan will never be for more than what the car is worth.