Having an auto loan that's higher than the actual value of your car is a drag, but it doesn't mean you're stuck. Whether you decide to change up your monthly payment routine or look into a refinance, you can close that gap and get your finances back on track. Here are some solutions for an upside down vehicle loan to help you get back on track financially.
Key Takeaways
- Being "upside down" on a car loan means the current market value of your car is below what you still owe the lender.
- You can dig yourself out by throwing extra cash at the principal, switching over to a biweekly payment routine, or refinancing for a better interest rate.
- Shifting your old debt over into a new loan should be your last option, since it can put you underwater all over again.
What Does It Mean to Have an Upside-Down Car Loan?
Having an upside-down car loan (its true term is "negative equity") just means you owe the bank more money than the car is actually worth on the open market. This turns into a real problem the second you try to move on from the vehicle. If you want to trade it in, or if you get into a bad wreck and the insurance company totals the car, that leftover debt doesn't just disappear. You either have to cut a check for the difference or roll that leftover balance into your next car loan, which just traps you in an even deeper financial hole.
How to Dig Yourself Out of the Hole
If you're stuck in a negative equity position, you can use these strategies to fix the issue:
Sometimes the easiest thing to do is keep making your normal monthly payments until the loan balance drops below what the car is worth as it depreciates. While you wait for those numbers to even out, you can add gap insurance to your coverage so you don't get wiped out financially if the car gets totaled.
- Refinance Your Existing Loan
If you're saddled with a high interest rate, refinancing into a lower rate means more of your monthly check goes directly toward knocking down the principal balance, helping you wipe out that extra debt much faster.
- Speed Up Monthly Payments
You don't have to follow the bank's calendar perfectly. Throwing extra cash at your balance whenever you have some accelerates the whole process.
Another great trick is to split your regular monthly bill right in half and pay it every two weeks instead. Doing this means you end up making 13 full payments over the course of a year instead of just 12, which chops down your interest and trims months off your timeline.
Putting your car up for a private sale will almost always bring in a bigger chunk of cash than letting a dealership take it as a trade-in. You'll still have to settle up with the bank to get the clean title transferred over, but it is a great way to put a stop to your ongoing interest expenses.
- Roll Your Debt Into a Cheaper Car
If you absolutely have to replace your current ride immediately, and you don't have the cash to clear the negative equity, you can trade it in and let the dealer roll that leftover balance into your next loan. To make this move work in your favor, you have to downsize to a much less expensive vehicle that won't lose its value overnight.
How to Keep From Going Upside Down on Your Next Ride
You can avoid this issue next time around, but breaking the habit means changing how you handle the buying process from day one:
- Put more cash down upfront: Making a strong down payment gives you an instant equity buffer right off the bat and helps you lock in shorter loan timelines and better rates.
- Choose a reliable used vehicle: Letting the original owner take that initial hit on depreciation keeps your total loan amount a lot closer to what the car is actually worth.
- Get your loan preapproved before heading to the lot: Shopping around for financing beforehand gives you leverage and keeps high dealership interest rates at bay.
- Stick to a shorter loan timeline: Keep your financing terms to 60 months or less so you can pay down the debt faster than the car naturally loses its value.
- Set a firm total budget: Focus on the total out-the-door vehicle price instead of letting a salesperson distract you with low monthly payment numbers.
- Always say no to expensive dealer add-ons: Skip the pricey extra packages and warranties that finance managers love to slide into your final loan paperwork.
Still Feeling Stuck? Let's Chat!
Dealing with a messy auto loan can be stressful, but you don't have to try to figure it all out by yourself. If you have any questions about your current equity numbers or want to map out the quickest way to get your car loan right side up, reach out to us so we can help you get started! We're here to help--it's the Alan Jay Way!