Lots of people buy cars through bank or dealership financing, and oftentimes, put little or zero down payment on them. Some people have existing negative equity on previous car loans which they carried over to their current car loan. Most of the time, these situations can lead to what’s called an upside down car loan.
What are upside down car loans?
When a loan turns upside down, it just means that the borrower ends up owing more money than the car is currently worth. If the borrower attempts to sell the car, he or she would have to deal with residual amounts owed. How does this happen?
First, the value of a car significantly depreciates the moment you drive it off the car lot. Even if a car is barely used, a used car will always have less value than a new one.
Second, not many people place enough down payments on their car loans to prevent it from going upside down.
Third, many people like lower monthly payments. For a while, these keep the car loan upside down because the monthly payments do not cover much of the interest at the beginning of the loan.
How to get out of an upside down car loan
Here are a few ways for you to deal with an upside down on car loan.
- Ask your current lender to finance the difference in value – If your lender agrees, you can sell the vehicle and make payments on the remaining balance on your car. If your goal is to get out of debt and if the monthly payments are easily manageable for you, you can choose this route.
- Consider dealing with a local bank or credit union – Try getting a small unsecured loan at from your bank or credit union. Unsecured loans from these institutions tend to have lower interest rates than car loans do. Unless you own a second car, ask for around $1,500 extra funding through the loan in order to buy a used car. That amount should be enough to cover taxes and plates. After you get your unsecured loan, you can go ahead and sell your car, fully pay for the upside down loan and buy yourself a used car to drive yourself to work every day.
- Save money – While this may take time, if you balance your budget a bit, you might be able to come up with enough money to pay off your upside down car loan and buy yourself a used car for temporary use.