10k upside down car

How to Get Rid of a Bad Car or Upside Down Car Loan

Have you ever heard someone say that his car loan is upside down? If you have, this is a bad car loan. This means that the car is not worth the money that is owed on it. Let's say that the car is worth $5,000 and $8,000 is owed. This can be due to refinancing the car, paying too much in the first place for the car, paying too much interest and other reasons. Even though this is a difficult situation to be in, you can get out of a bad car or upside down car loan.

Keep the car. This will eventually get you out of the bad loan if you keep paying. The loan amount will become less than the car's value. So just hold your horses if you can.

Sell your car at a loss. Sometimes you have to cut your losses and move on to your next venture. Get what you can for the car and relieve yourself from the stress associated with this bad car loan. This method will also help you keep or get your credit report together. Keep in mind that to sell the car you have to pay off your lender first.

Borrow enough money to pay off the car loan. Try to get a lower interest rate using collateral like a home equity line of credit. Another option is to obtain an unsecured loan from your credit union or bank. You can then take that loan amount and apply it to the balance of your bad credit loan or remaining balance after you sell the car.

Find ways to make extra money to pay it off. You can work overtime, get a part-time job or start a part-time business. Put all of the extra cash toward getting rid of that bad car debt. Use any extra money to smash this bad car debt. If you get an income tax and, bonus from work, interest from an account, inheritance or any kind of extra cash feel obligated to use it to pay off that bad car loan.

How to Buy a Car if You're Upside Down on Your Loan

10k upside down car

The recent economic upheaval left many Americans with large amounts of debt and other financial problems. One such problem is the upside down car loan. You have likely heard about the many houses that homeowners have walked away from once they owed more than the home’s value. Similarly, car owners are finding themselves perplexed when the amount they owe on a car surpasses it's current value. Are you in this position? There's some good news.

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.

How Can You Get a New Car While Upside Down on a Current Car Loan?

So what do you do if you are upside down on your car loan but really want (or need) to buy a new car? You need to be very careful that you do not put yourself into deeper financial trouble by taking on more than you can reasonably afford to pay each month. If you default on your loan or fail to pay your other bills because you are trying to keep current on your car payments, you can find yourself with extremely bad credit.

Life is more expensive for people with bad credit. They typically have to pay higher interest rates on loans, they frequently get stuck with late fees and other charges and, believe it or not, they pay more for their insurance. This is because, statistically, those with bad credit pose a greater risk to insurance companies. However, if you shop around for coverage, you might still be able to get a lower rate than you're currently paying. Independent agents in the Trusted Choice В® network work with several insurance companies, not jut one. They can show you several quotes for coverage, no matter your credit score and financial past.

When it's time to buy a car with an upside down loan already in place, you need to be smart. You may want to look into some of the possible solutions below.

Just because you want to buy a car doesn’t mean it has to be a new car. Used cars are a financially savvy option, particularly for those who are in a position where their current car has an upside down loan. The original owners have already paid the bulk of the car’s depreciation, so your vehicle, which will be more affordable, will also retain its value longer:

  • Pros: You will save money on depreciation costs and may be able to save a significant amount of money while you get your finances back in order. Once you have your loans completely paid off, you may even want to trade your used car in on a new one. Just be more careful this time!
  • Cons: If you have your heart set on a new car, this option will require you to wait until you are in a better position financially. You may not be able to find a used car in the make, model or color that you prefer.

Look for deals and incentives. Cars that do not sell well can take up space on a dealer’s lot. This cramps that dealer's style, taking up space that more popular models could occupy. When this happens, either the car manufacturer will offer the dealer incentives in the form of large rebates or the dealership will offer great incentives to their customers. Either way, you can come out a winner. If the dealer offers you a rebate that can cover the remainder of your car loan, you can be free and clear of your upside loan as soon as the rebate goes through:

  • Pros: Allowing the dealership or the manufacturer to cover most or all of your remaining balance is a shrewd maneuver.
  • Cons: The value of these poor-selling, incentivized vehicles has a tendency to depreciate faster than other cars. In the short term, you may find yourself with another upside loan. You can mitigate this problem by making extra car payments to the principal of your car loan for the first three years.

Solution #3: Roll Your Remaining Debt into a New Loan

An option that the sales staff at a car dealership will be more than happy to offer you is increased financing on your new car loan to encompass the old one. Of course, this is not a solution to getting rid of your upside car loan, as it puts you right back into that situation. However, if you desperately need a new car, this is how you can buy one.

  • Pros: You will be able to drive off the lot in a new car while putting your previous car loan to bed.
  • Cons: You will still have an upside loan, your car payments will be much higher than they would be otherwise and you will end up spending a lot more in interest. This method is also risky. If an accident results in your car’s destruction or if someone steals your car, your insurance can only cover you up to the value of your car. So, you may end up with a pile of debt and no vehicle at all if such a thing were to happen.

If your current car is still drivable, you may want to consider keeping it for as long as possible while you pay off your current upside down loan. By taking out a home equity loan or unsecured loan with a lower interest rate than the one you are currently paying, you can opt for a car payment schedule that enables you to pay off the debt quickly. You can speed up the process of improving your negative equity even more by paying extra toward your loan whenever you have extra funds available:

  • Pros: This method will enable to you to eliminate your debt in the fastest and least expensive way possible.
  • Cons: You'll have to hold off purchasing a new car until you have successfully paid off your current one. This is fine if your current car is still running, but if you need to purchase a new car now, one of the other options will have to do. Another problem may exist if you have very bad credit. This may make it impossible to find a lender who will offer you a loan at a reasonable interest rate.

This option is a last resort that you should consider only if you are struggling with overwhelming debt in all areas. If you are spiraling deeper into debt each month and can find no way out, bankruptcy may be your only solution. If you're court-approved for Chapter 7 bankruptcy, you may be able to eliminate you car debt. If you file for Chapter 13, you may be able to renegotiate you car loan to something more affordable.

  • Pros: Bankruptcy will enable to you to climb out of the red.
  • Cons: This will leave you with extremely poor credit and can make it impossible to buy a new car for years to come. During this time, you may be limited to purchasing only used cars that you finance at extremely high interest rates.

Prevent Upside Down Car Loans from Happening Again

Once you have managed to clear up your problems with your upside car loan, do what you can to keep yourself from ending up in the same situation again. Try to avoid buying new cars unless you have the funds available to put at least 20 percent down. Also, keep your vehicles well insured and avoid buying more car than you can reasonably afford.

Do you have an upside down car loan horror story? Share it in the comments.

Understanding an upside-down car loan and the options for changing vehicles

10k upside down car

An upside-down car loan is a situation in which you simply owe the lender more than the vehicle is worth.

For example, you still have $12,000 outstanding on your auto loan, but the vehicle’s value is just $9,000, so you’re upside down by $3,000.

It’s also known as negative equity or being “under water,” and it’s a growing problem in the U.S., according to Debt.org, a debt help organization.

There are numerous ways negative equity on a vehicle may arise. Common scenarios include:

  • Depreciation– Cars inevitably lose value once they’ve been purchased, and new cars depreciate by about 20 percent as soon as they’re driven off the dealer’s lot. By year three, they are reckoned to have lost 50 percent of their value. That’s a large chunk, and this may be a factor in an upside-down car loan, when, over just a few years, the money owed on the auto loan becomes greater than the vehicle’s market price.
  • Small or no down payments– Seeing as new cars depreciate quickly, and could lose a fifth of their value on exiting the dealer’s driveway, putting little or no money down to reduce the loan amount at the start may be a factor that leads to an underwater loan. And that sinking feeling.
  • Long loan terms– A lengthy loan term might mean car payments are being made at a slower rate than the depreciation of the vehicle’s value.
  • Rollover loans– A rollover loan may take place when you’re buying a new car but still owe money on your current vehicle. The debt on the existing loan is added, or rolled over, into the loan for the new car. This will increase the total loan amount and may result in negative equity if the loan value is greater than the value of the new car you’re buying.
  • Overpaying for a car– Paying above the market price for a vehicle might inflate the loan amount needed to buy the car, and is another possible factor in an upside-down auto loan.
  • Add-ons – Optional extras on a new vehicle like leather seats, or add-ons such as GAP insurance and service contracts, can mount up, increasing the cost of your purchase and, potentially, the size of your debt.

How to get out of an upside-down loan, and the options for changing vehicles

If you want to get out of an upside down situation, change vehicles, or both, what are the options? The Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) offer some straightforward advice to help with the main choices.

First of all, check the value of your current vehicle to see exactly where you stand financially, says the FTC, and consider waiting until you’ve paid back enough of your auto loan to the point where you have positive equity, and owe less than your vehicle’s value.

This process could be speeded up by making extra payments that go completely toward paying down the principal loan amount, rather than to interest charges. You can read more about paying off a car, and the roles of interest and principal, in our articles about how early payoffs and auto loans work.

Selling your car yourself is an option, and may get you a higher price than trading it in to a dealership.

If you do decide to trade in your vehicle, which is a common choice, there are a number of things to be aware of that may help.

A dealer might promise to pay off your current loan upon trading in, but when you have negative equity, it may not be entirely paid off, cautions the FTC.

“Make sure you understand how your negative equity is being treated before you sign a contract,” it says, and find out if it is being rolled into the new loan, and what the terms will be, including monthly payment. The length of the loan is also important as a longer loan term means it may take more time to reach positive equity, and turn from upside down to right side up.

In general, rolling the balance of your current auto loan into a new one could make that new loan much more expensive, says the CFPB, and may increase the chance of negative equity on your new car.

When you’re ready to purchase your next vehicle, apply for financing online with RoadLoans, the direct-lending platform of Santander Consumer USA.

Apply for a car loan and get an instant decision.

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