If you're feeling upside down about your car loan, you'll owe more on your car than it's currently worth. But while dealing with a car loan upside down can put you in a stressful financial situation, there are ways to get back to positive equity. Here's what you need to know about how to get out of a car loan upside.
Before you can begin the process of getting out of a reverse car loan, you need to calculate your negative equity. To do this, you subtract the value of your car from the amount you still owe. You candetermine the value of your carusing industry guides such as Kelley Blue Book or Edmunds.
Once you've calculated your negative equity, you can move on to one of the following strategies.
Pay off your loan
If you are having problems with your loan, you need to take stepspay off your loan faster. If you have enough room in your budget, you can make additional payments to speed up the repayment process. This can also help you save money on interest over the life of the loan.
Another option is to save and pay off your loan in one go. Paying off your loan before the term is up can save you money, but be sure to check your loan agreement to make sure you don't owe any debt.penalty for prepayment.
Refinance your loan
If you don't have the extra income to pay off your car loan faster, you may want to do sorefinance your car loan. This means that you take out a new loan to repay your original car loan, ideally with better terms and a lower interest rate.
While refinancing your car loan won't eliminate your negative equity, it can make paying off your car loan easier, especially if you qualify for lower annual percentage rates (APRs) than you're currently paying. Use one to see how this strategy can help youautomatic refinancing calculatorto determine how much you can save.
Sell your car
If you want to downsize to something cheaper, consider selling your car. While a private sale may give you enough money to cover both your loan balance and negative equity, there's still a chance you'll have debt on your car.
Remember thatselling a car while you still have a loancan be complicated, especially with negative equity. Before you sell, it's a good idea to talk to your lender about what's expected from the sales process.
Turn in your car
Returning your car means you are giving the vehicle back to the lender. While giving up your car isn't ideal, voluntary surrender is a much better option thanseizure of car.
If your lender repossesses your car and the sale doesn't cover the remainder of your loan, you could still be held responsible for the remaining balance. Additionally, repossession can significantly harm your credit score.
What is a reverse car loan?
A reverse car loan occurs when your car is worth less than what you owe on it. This is also called negative equity or underwater on the loan. To trade in or sell your car and get a new onecar loan, you must first pay the difference.
Suppose your car is worth $10,000, but you still owe $12,000. In this case, you are $2,000 behind on your loan and need to pay off that amount to sell or trade in your car.
It can be easy to end up with negative equity. You may be underwater on your car loan if any of the following scenarios apply to you:
No cash purchase
To save money, some car buyers opt for itbuy a car without a down payment. If you don't invest money on a car, you end up financing not only the price of the car, but also taxes, licensing, registration and fees. This could cause your financed amount to exceed the value of the vehicle. Aside from helping you maintain a positive net worth, a healthy onepay outyou can reduce your monthly payments and the amount you pay in interest over the life of the loan.
Long loan terms
Long term car loansmay sound tempting to consumers working with budget constraints because they result in smaller monthly payments. But with a car loan with a long repayment term, the payments can be spread out so widely that a car loses its value faster than you can pay off the loan. Moreover, the longer the term of the loan, the more you pay in interest. It's a good idea to choose the shortest loan term you can afford.
The value of the car drops too quickly
Typical,cars fallin value by 20% within one year of ownership. After another four to five years, the car depreciates another 15 to 20%. The more a car falls, the more its value will decrease. If your make and model depreciates too quickly, you'll end up owing more than you could sell it for.
Too expensive vehicle
If you pay more for the car than it is worth, you run the risk of being left upside down with your car loan. Compare car prices from different sellers to find the best deal. Keep in mind that the price of a car includes more than just the balance; you also need to consider taxes, fees and interest.
Revolving loan
In some cases, your lender may offer to combine your negative equity with your new car loan. While this strategy can help you get a new ride, you're starting with a loan that's already upside down.
This way you avoid a car loan upside down
During the car buying process, there are several strategies that can help you avoid a reverse car loan:
- Offer a bigger payout:Make sure you follow this when you buy a car20/4/10 the rule— this means you need to make a down payment of at least 20% of the car's value. Even a few hundred dollars can prevent negative equity and help you stay on the right side of things.
- Choose a short repayment period:The 4/20/10 rule also suggests a loan term of no longer than four years to avoid negative equity. Ashort term car loanmeans you pay less interest over time and pay off the loan faster.
- Avoid unnecessary additions:Some vendors may pressure you to accept unnecessary add-ons such asextended car warranty.If you finance surcharges, you run the risk that your loan will exceed the value of your car. However, some additions can be helpful when it comes to taking out a reverse car loan.GAP insurancefor example, it covers the value of your net worth if your car is totaled or stolen.
- Search for prizes:As with any financial product, it's important to compare rates, terms, amounts and fees with at least three lenders before signing on the dotted line. By getting onepre-approve car loanwith a few lenders, you're more likely to get your lowest APR and save money on your loan.
- Buy a used car:New cars may have more bells and whistles, but used cars tend to be much more affordable and hold their value better. When comparing new and used cars, consider your budget and be realistic about what you can and cannot afford. A new car can still be a good option, provided you can afford a reasonable down payment and a short loan term.
- Pay taxes and duties in advance:Instead of adding taxes and fees to your car loan, save up to pay for these costs upfront. This can save you money and reduce your loan balance.
You may be able to get out of a car loan upside by paying it off in one lump sum or with additional payments, refinancing your car loan, selling your car or transferring it to your lender.
Some banks may be willing to refinance an upside down car loan, but this depends on the amount you owe and your creditworthiness. Some lenders will finance up to 125% of a car's value, but you'll likely need good credit and a high income to qualify.
While you canchange a carwith an upward loan, you may need to transfer the negative equity to your new car loan. This may be a good idea if your car needs expensive repairs, but it may be a better idea to reduce your negative equity first.
While negative equity will notdamage your credit score, you'll start to damage your credit if you can't keep up with your monthly payments. If you can't afford yoursmonthly loan paymentContact your lender and consider refinancing your car loan.
