Your car loan is “upside-down” when you owe more on your vehicle than it’s worth. This is also called being “underwater” or having negative equity. It’s an unfortunate situation to be in, but you’re not alone. Around 60% of people looking to trade-in their car face the same problem, says U.S. News & World Report.
But, is trading in your car the right way to get out of an upside down car loan? The only way? We don’t think so. Check out our top tips for dealing with an upside down car loan and decide for yourself.
Am I upside down on my car loan?
First off, how do you know if you’re one of the many people with an upside down car loan and if so, by how much? Here’s how to tell:
- Look up the trade-in value of your car. Kelley Blue Book is a great resource for this. Enter in your car’s make, model, mileage, and condition to see it’s trade-in value. For this example, let’s say your car’s trade-in value in $10,000.
- Check the balance of your current car loan. Review your last loan statement or contact your lender. How much is the remaining balance of your car loan? If you have a $13,000 car loan remaining and the trade-in value of your car is $10,000, you’re upside down by $3,000.
How do you handle an upside down car loan?
You have a handful of options available to you, all with their own upsides and downsides. The right solution will depend on your situation and whether or not you want to keep driving your current vehicle.
Option 1: Keep your car until you have equity.
“Keep the car until you’re at a point where you have equity in the vehicle — where the loan balance has declined below the current market value of the vehicle,” recommends Greg McBride, chief financial analyst for Bankrate. “If you keep the car until the loan is paid off, there’s no risk you’re going to be upside down, because you don’t owe anything on the car.”
- Upside: You could have equity to work with when you’re ready to buy a new car.
- Downside: You can’t buy a new car right now. If your car has excessive wear and tear, your equity could be limited in the end.
Option 2: Sell your car to a private party.
If you don’t want to keep the car until your loan is paid down or paid off, you can try to sell it to a private party. Selling to a private party can often get you more money than if you traded it in at the dealership. Here’s the catch: you still have to come up with the funds to pay for the negative equity on your loan if you can’t convince the buyer to pay more than the car is worth. Very few buyers, if any, will be willing to do that.
- Upside: You say “sayonara” to your car and car loan.
- Downside: There’s no saying “sayonara” to your negative equity. You still have to come up with the cash to cover it. The amount will depend on how much you can make selling your car to a private party.
Option 3: Trade in your car and roll-over the current debt.
Let’s say you can’t wait another second to buy a new set of wheels. You can trade in your current car, drive off the lot in a new one, and roll your existing debt into a new car loan.
- Upside: You get to drive a new car! Everyone loves that new car smell, right?!
- Downside: Your old debt doesn’t disappear. It’s rolled into the purchase of the new car, leaving you even more upside down.
Option 4: Refinance your current car loan.
Review your current interest rate and loan term. If your car loan carries a high interest rate, it’ll take you longer to pay down the balance. That leaves you upside down, longer. If you can refinance the loan at a lower interest rate, you may be able to pay it off sooner and save more money in the long run. You could also look into refinancing with a shorter-term loan. Your monthly payments will be higher, but you’ll have your head above water sooner.
- Upside: Refinancing your car loan can make paying it off more manageable and save you money in the long run.
- Downside: Your monthly payments could increase depending on your circumstances and refinancing terms.
Apply to refinance through myAutoloan
You don’t have to keep gasping for air if you’re underwater on your car loan. There are a variety of roads you can take to alleviate the financial stress sooner, and myAutoloan can help with the right refinancing solution for you. You may be able to refinance your car loan for a shorter term or get a better interest rate so you can pay off your car loan faster. Explore your refinance options on myAutoloan to see how you can get out from under an upside down car loan today!