As this is being written the average loan term for a new car is 65 months — or just over five years. Experts caution buyers to avoid going longer because of the risks extended loan terms entail. One of the most significant of these risks is owing more for the car than its market value — or becoming “upside down” in the loan.
It’s also just one of several ways that can happen.
Fortunately, getting out of an upside-down car loan is doable.
But it will cost you.
How It Usually Happens
If you make a small down payment on a new car, go for dealer add-ons or offer to pay more than the car is worth, you will risk becoming upside down in the loan on that car. You must also be careful to avoid accepting loans with high annual percentage rates of interest, as those can also push your loan amount beyond the value of the car.
Overlooking taxes and fees is another good way to end up owing too much. Additionally, if the car you’re trading in to get your new one has an outstanding loan you could push yourself in a negative equity position in your new car.
Your Best Options for “Righting” the Situation
When it comes to matters of finance, there are very few problems more money can’t resolve. In the case of a negative equity situation, biting the bullet and paying the loan off as scheduled will get you out of the situation eventually — it’s also one of the more costly solutions.
Making extra payments will satisfy the obligation sooner and reduce the amount of interest you’ll pay overall. Another way to do this is to make your car payments on a bi-weekly basis, as opposed to monthly. This will give your lender an extra payment each year with minimal impact on your monthly budget.
If the loan is pretty young, try to refinance into a more favorable one. This can sometimes be done even with credit problems. The interest charged on bad credit car loans varies by lender, so look for one willing to lower your present rate to get your business.
Selling the car to a private party can get you more than any dealer will offer. When you find a buyer, pay the difference between the sale price and the loan amount out of your pocket to satisfy the obligation.
Whatever else you do, the absolute worst method of getting out of an upside-down car loan is rolling the negative equity into the financing of a new car. That’s just kicking the can farther down the road, and it will be way bigger when you need to kick it again.
Choosing the Best Strategy
You must determine how much more you owe than the car is worth to help you decide which of those ideas is best. Value guides at KBB.com and NADA.com will help you find the car’s fair market value.
With that information in hand, contact your lender and ask for the loan payoff amount as of the first day of the upcoming month. Subtract the value of the car from the number they give you to calculate your equity position.
If it’s negative, but the numbers aren’t too far apart, selling the car and paying off the difference might be the best way to go. If you can’t do this comfortably and you have a very high interest rate, refinancing might be the move instead.
Whatever it turns out to be, examine the situation carefully to see how you got into this position and do not make the same mistakes again.