How to Get Out of an Upside Down Car Loan

Next to mortgage or rent payments, owning an automobile is the second largest household expense in the United States today. Gas, maintenance, repairs, and insurance can hit our wallets hard each month in addition to regular loan payments on the vehicle itself. Also, hidden within those loan payments, one cost that many of us may not be aware of is the impact of a car’s value depreciation.

What is an upside down loan? –

Within the first two years of ownership, cars can depreciate anywhere from 30 to 40 percent of their original value. Thanks to such high depreciation rates, many people find themselves in an “upside down car loan”, meaning they owe more money on their car than it’s currently worth. An upside down loan situation frequently occurs when people put little or no money down on the purchase of their vehicle, if their loan term is lengthy (5 years or longer) or has a high-interest rate, or if they roll a previous car loan into their new loan.

Owners who are caught in an upside down loan have negative equity on their vehicle, meaning they have no ownership equity and closing the loan would require additional out-of-pocket expenses in addition to what has already been paid. If you find yourself in an upside down loan, you may want to consider selling your car and trading down for a much cheaper vehicle to get you around town.

Know the value of the car –

Before you begin the process of selling your car to get out from under your upside down loan, the first thing you will want to do is figure out the current value of your vehicle using Kelley Blue Book, Edmunds, or Autotrader. Using the make, model, mileage, and current condition of your car, Kelley Blue Book can help you determine a price range to work with.

Once you have determined your car’s estimated value, pick up a “for sale” sticker and start advertising online on websites like Craigslist and in your local paper. And remember, you are likely to get more for your vehicle through private sales rather than selling to a dealership.

Finally, you may wish to consider financing the difference on what you owe. For example, if you owe $20,000 on a car that is only worth $15,000, set up a meeting at your bank or credit union to discuss options you may have in financing the $5,000 difference. Although you will be taking on new debt, it is worth considering selling the vehicle and owing $5,000 versus owing $20,000.

Long car loans: lower monthly payment = more interest –

One of the most important considerations when purchasing a new car is the terms of your new car loan. Most people want the lowest possible monthly payment, and this is often accomplished by taking out a loan with long terms. Did you know that choosing to take out a longer car loan will result in paying more interest over time? While a longer car loan may make a more attractive lower monthly payment, you will still be shelling out more money in the long run.

Your car loan could be costing you more money –

If you’re like most people, you’re looking for ways to make your monthly bills more affordable. It’s not beneficial to take out a longer car payment just to make your monthly payments smaller. Choosing a shorter car payment will make your monthly payments a bit higher, but will allow you to pay less money overall. Families who take out longer car loans end up paying thousands of extra dollars for a car.

Using an online loan calculator before you buy a car is a good idea so that you can see in black and white just how much you will be paying over time. The average person borrows around $20,000 for an automobile. A three-year loan at 7% would equal about $618 per month, a four-year loan payment would be $480, a five-year loan $396, and a six-year loan $341. There is a big difference in month payments, but would you rather pay four years of interest or six years of interest? The longer the term, the more interest you are paying to the bank.

You could find yourself under water –

Another negative to choosing a longer loan payment is the fact that you may not even keep your car for the whole loan period. Cars don’t have an infinite shelf life – they wear out and repairs can become costly. Some cars completely break down after just a few years. If you need a new car before you are finished paying for it, you will be required to satisfy your old car loan debt at the time you purchase a new car. This may mean that you will be sucked into a never-ending cycle of car debt.

Before purchasing a new car, it’s important to do your research. You need to make sure that you understand all of the terms of your car loan. If you have the financial capabilities to take out a shorter car loan, do so. You may end up paying a higher car payment each month, but you will be saving a lot more money on the total cost of your car.

Get budgeting help & debt management advice –

If you’re looking to find better ways to manage your money, contact Advantage CCS. We’re a national non-profit credit counseling company that offers free credit counseling and debt management planning. You can take advantage of money-saving tips, learn ways to minimize your debt, learn how to budget, and if you are struggling to pay your bills, the counselors can work with your lenders to help you repay your debt in smaller, more manageable payments.