If you owe more on your car than it’s worth, you’re upside-down on your car loan. (But there are ways to get out from under that loan.) Becoming upside-down on your car can happen for a couple of reasons.
How it happens
If you buy a brand new car and finance the entire thing, you’ll be upside-down on it the minute you drive off the lot due to depreciation. This can be a big problem if you wreck the car. (Trouble in that situation can be avoided by buying gap insurance from the get-go.)
But trade-ins are another big reason people become upside-down on their car. You may have bought a car, traded it in a year or two later, and rolled the remaining balance into the new car loan. Do this once or twice, and you can end up owing a significant amount of money on a car that’s worth comparatively little. Getting out of this situation is a little trickier, but it’s not impossible.
Here’s what to do if you’re upside-down on your car loan.
If you’re upside-down on your car loan, first take these 3 steps:
- Find out the value of your car
The value of your car is what a stranger will pay for it. To find this, first go to the Kelley Blue Book site and input your car’s details. Make a note of both the private party value and the dealer trade-in value.
Next, check private party listings in your area to see how asking prices there compare to what the Kelley Blue Book said. You can look online and in magazines like the Auto Trader for this information. This should give you a general idea of the value of your car.
- Find out how much you owe.
Call up your lender or check online to get an idea of the total amount that you still owe. (Some places may charge you a fee for a payoff balance, so be aware of that.)
Find out how upside-down you are on the car loan.
Subtract the value of your car from the amount you owe. For example, if you owe $22,800 on your car, and it is worth approximately $9400, the difference between the two is $13,400. This is the amount that you are upside-down on your car.
Knowing those numbers gives you a starting point.
Once you know the amount you’re upside-down on the loan, it’s time to make some some tough decisions.
You need to look at your financial situation carefully. Can you afford to continue making your current payments, on time, and still pay for your other expenses, with something left over for savings? Without taking on more debt elsewhere?
If the answer is yes…
If the answer is yes, the easiest way to get out from being upside-down is simply to hold on to your car until after you pay it off.
Resist the urge to buy a new one, no matter how appealing that may seem. Remember that car dealers do NOT have your best interests in mind. It’s common for people to end up even MORE upside-down on their next car, because their old debt gets rolled into the new car loan. That’s only delaying the inevitable, and making it even harder to get out from under the loan.
Remember also that it’s usually cheaper to make repairs — even big repairs — than it is to make years and years of very high payments. (See car repairs vs. car payments for more info on that.)
If the answer is no…
If you can’t afford to continue making your payments until the car is paid off, you have two basic choices if you don’t want the car repossessed.
Either find a way to make more money and cut expenses so that you can afford to keep the car, or find a way to sell the car to a private party.
(Remember, doing trade-ins at a dealer will usually just make the situation worse. Private parties usually pay more as well, because they don’t have to make a profit. The just want a good car.)
Selling a car you’re upside down on to a private party
In order to sell the car to a private party, you’ll need to come up with the difference between what the car sells for and what you owe on it. This is because your lender will need to be repaid in full before they will release the title for the car to the new owner.
You can do this by taking out an unsecured loan for the difference (credit unions where you actually know the loan officers are good places to check for those), by selling other items or paid-off vehicles to come up with the difference, by working extra hours, etc.
It can take a lot of work and time to get out from under a car loan that you’re upside down on it, but it’s worth it. The key is to stop the cycle. You’ll be in a lot better place financially once you’ve done so.
Getting rid of that upside down car loan that’s dragging you down will be so worth it!