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An upside down car loan can sell your vehicle and make your future financing eligibility more challenging. Don’t be discouraged if you’re in this scenario. You can take steps to minimize negative equity and avoid being upside down on future car loans.
What is an upside down car loan?
If your vehicle is taking out more loans than it is worth, the car loan will be upside down. For example, if the car is worth $12,000, the loan is considered upside down, but the loan balance is $15,000. In this scenario, there is a $3,000 negative equity.
For many people, turning upside down isn’t always a problem. If you are not planning to sell your car, you can continue paying until the loan is paid back. Even if you have an upside down car loan, the way you interact with your lender will not change. It only works if you need to switch vehicles before the loan is fully repaid.
Why Negative Equity is a Problem
If you’re upside down on a car loan, it’s more difficult to trade at a dealer or sell your vehicle personally, as you’ll have to pay negative shares at your own expense. You can technically roll in negative equity onto a new loan, but this increases the chances of it turning upside down again.
Negative equity can also be an issue if your vehicle is totalling. After an accident, your insurance agent will pay the value of your car. However, even if you have an upside down loan, you still owe that amount along with the remaining negative fairness.
What causes a car loan to turn upside down?
There are several common ways people can turn upside down on car loans.
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Funding for cars with no money. Due to depreciation of a car, the vehicle can lose up to 20% of its value in the first year of ownership. If you don’t have a down payment, it won’t take long for depreciation to overtake your fairness.
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Choose a long repayment period. Some lenders are offering new vehicle financing for up to 84 months. This will lower monthly payments, but your car may depreciate more than your original purchase by the end of the long loan term.
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Buy a gorgeous model. Luxury cars tend to depreciate much more quickly than their counterparts. Combined with high costs, if you choose to buy instead of a lease, you are more likely to have negative fairness.
How to know if your car loan is upside down
Having an upside down car loan isn’t necessarily bad, but knowing where your loan is is useful.
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Request a quote in return. A payoff estimate is a document that shows exactly how much you currently rent to your vehicle, including interest rates.
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Calculate how much your car is worth. Kelley Blue Book, Edmunds and other online carview sites can estimate the value of your vehicle. You can also request a trade-in estimate from your local dealer to measure the likelihood of a selling price.
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Do math. Subtract the remaining loan balance from the value of your car to determine your stock. If the number is negative, you will have an upside down loan.
How to get out of an upside down car loan
If you don’t have an upside down car loan, it’s easier to sell or trade on a vehicle, but if you already have one, there are a few options.
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Make additional payments. Make extra payments each month can help lenders build faster, especially when instructing lenders to pay the loan principal.
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Refinance your loan. By qualifying for a shorter period or a lower car loan refinance rate, you can ensure that more payments are headed towards your principal.
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Keep your car. Continue to pay until your car loan is fully repaid. The remaining shares at the end of the loan can be converted to cash through sales or trade-in.
7 tips to avoid getting upside down on your future car loan
If you plan to buy a vehicle right away, there are ways to reduce the risk of being upside down.
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Decide what you can afford. Please follow the rules on April 10, 2019. This is a good idea to recommend a 20% down payment budget with a 4-year repayment period and a 10% transportation cost.
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Pay the down payment. Down payment (usually more than 20% of the total cost of a car) can be hampered for more than a car. Try taking advantage of cashback maker rebates and trade-invaluations from previous cars.
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Avoid dealer add-ons. Beware of car loan add-ons funded through car loans. These can dramatically increase your costs and increase the risk of being upside down.
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Shop for the best loan. Shop for the lowest car loan fee, not the default for dealer loans offered. This helps to dedicate the most money to the principal rather than to the interest.
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Pay full taxes and fees. Taxes and fees on your loan will automatically be automatically turned upside down. Because you’re funding your car more than it’s worth. Instead, cover additional costs with a down payment.
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Choose the appropriate loan term. Choose the shortest loan period you can afford. This also helps reduce total loan costs.
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Choose a vehicle with slow depreciation. Some cars are more valuable than others and depreciate slowly. Sources like Kelley Blue Book and Edmunds calculate the expected depreciation to aid your research.
Conclusion
Being upside down simply means you owe more than your car is worth it. Unfortunately, most of the time, there is a way to get up to the right again, although it is almost inevitable at the start of the loan term.
There is also a way to minimize the time to turn it upside down. If possible, make extra payments and increase your down payment and refinance. When shopping, you can use an auto loan calculator to estimate whether it will go from negative equity to positive equity and quickly go to the right.
