The recent economic upheaval left many Americans with large amounts of debt and other financial problems. One such problem is the upside down car loan. You have likely heard about the many houses that homeowners have walked away from once they owed more than the home’s value. Similarly, car owners are finding themselves perplexed when the amount they owe on a car surpasses it's current value. Are you in this position? There's some good news.
An upside down car loan, also known as a negative equity car loan, is a loan where you owe more for your car than it is worth. You can get yourself into such a situation in a number of ways:
No matter how you got into your upside down car loan, the most important thing is to rectify it as quickly as possible. This will save you a lot of money in the long run.
So what do you do if you are upside down on your car loan but really want (or need) to buy a new car? You need to be very careful that you do not put yourself into deeper financial trouble by taking on more than you can reasonably afford to pay each month. If you default on your loan or fail to pay your other bills because you are trying to keep current on your car payments, you can find yourself with extremely bad credit.
Life is more expensive for people with bad credit. They typically have to pay higher interest rates on loans, they frequently get stuck with late fees and other charges and, believe it or not, they pay more for their insurance. This is because, statistically, those with bad credit pose a greater risk to insurance companies. However, if you shop around for coverage, you might still be able to get a lower rate than you're currently paying. Independent agents in the Trusted Choice® network work with several insurance companies, not jut one. They can show you several quotes for coverage, no matter your credit score and financial past.
When it's time to buy a car with an upside down loan already in place, you need to be smart. You may want to look into some of the possible solutions below.
Just because you want to buy a car doesn’t mean it has to be a new car. Used cars are a financially savvy option, particularly for those who are in a position where their current car has an upside down loan. The original owners have already paid the bulk of the car’s depreciation, so your vehicle, which will be more affordable, will also retain its value longer:
Look for deals and incentives. Cars that do not sell well can take up space on a dealer’s lot. This cramps that dealer's style, taking up space that more popular models could occupy. When this happens, either the car manufacturer will offer the dealer incentives in the form of large rebates or the dealership will offer great incentives to their customers. Either way, you can come out a winner. If the dealer offers you a rebate that can cover the remainder of your car loan, you can be free and clear of your upside loan as soon as the rebate goes through:
An option that the sales staff at a car dealership will be more than happy to offer you is increased financing on your new car loan to encompass the old one. Of course, this is not a solution to getting rid of your upside car loan, as it puts you right back into that situation. However, if you desperately need a new car, this is how you can buy one.
If your current car is still drivable, you may want to consider keeping it for as long as possible while you pay off your current upside down loan. By taking out a home equity loan or unsecured loan with a lower interest rate than the one you are currently paying, you can opt for a car payment schedule that enables you to pay off the debt quickly. You can speed up the process of improving your negative equity even more by paying extra toward your loan whenever you have extra funds available:
This option is a last resort that you should consider only if you are struggling with overwhelming debt in all areas. If you are spiraling deeper into debt each month and can find no way out, bankruptcy may be your only solution. If you're court-approved for Chapter 7 bankruptcy, you may be able to eliminate you car debt. If you file for Chapter 13, you may be able to renegotiate you car loan to something more affordable.
Once you have managed to clear up your problems with your upside car loan, do what you can to keep yourself from ending up in the same situation again. Try to avoid buying new cars unless you have the funds available to put at least 20 percent down. Also, keep your vehicles well insured and avoid buying more car than you can reasonably afford.
Do you have an upside down car loan horror story? Share it in the comments.