The Truth About ‘Upside Down’ Car Loans

Upside Down  Auto Loan

Having an upside down car loan can at best be a difficult situation. Often you can find yourself stuck — unable to get yourself out of the hole you’re in financially in terms of your car. There are things you can do, however, to get yourself on the right track and no longer be upside down on your loan.

Upside Down – What Does It Mean for You?

When you’re upside down on your car loan, it essentially means that the car is worth less than you currently owe on it. This is a unique type of debt, though it’s not fairly uncommon. In fact, 32 percent of car owners are upside down on their loan.

It’s a frustrating position to be in — when you go to sell your car or trade it in, you can’t get enough for it to pay the balance of your loan. Then, you’re stuck paying for a car you no longer have as well as having to pay that balance along with a new one.

There are many factors that can contribute to an upside down car loan, including impulsive purchasing. The truth is, many people who have an upside down car loan were simply too impulsive when it came time to buy — they didn’t carefully consider all the factors included in the financing.

Things like dealer incentives and smaller payments may look attractive, but can ultimately contribute to upside down loans — take, for example, tempting incentives like no money down. When dealers offer zero percent down or even long-term loans, it takes longer to pay off the car. Factor in depreciation and it can become clear to see why so many people are upside down on their loans.

“There’s been a lot of water building behind this dam for some time because of higher transaction prices, lower down payments and long-term loans,”  chief analyst Greg McBride said from BankRate.com

How To Get Out Of It

 Of course, the best way to get yourself out of an upside down car loan is to pay it down until you no longer owe anything, then sell it. At the very least, paying itdown until the loan is lower in value than the car is. It might take some sacrifice, but be worth it in the long run.

Another great way to avoid an upside down loan is to follow a very simple rule — always make a down payment of at least 20 percent. Because the value of the car depreciates 20 percent as soon as you drive it off the lot.

Making a 20 percent down payment equals that amount. Also on months that you can, try to make bigger payments than the minimum that is required.

A highly-recommended remedy for upside-down loans is to consider a lease. Leasing can be a smart option when looking to get a car, and often times it can be done by rolling the cost your current car into your lease. Leasing is an alternative because there’s no loan involved.

One rather drastic solution, which may not work for everyone, is to sell the car and take out a second loan to cover the amount you still owe. This can be difficult because of the added financial pressure, but it is an option for some people.

No matter what decision you make in regard to an upside down loan, always make sure to consult Kelly Blue Book and find out your car’s true value before pursuing any sort of solution.

Simply stated, don’t forget to do the math — deduct your car’s value from the amount you owe and find the right option that works for you.

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