What to do if you’re upside down on your car loan


There are several ways to get your loan back upside down. A complete assessment of your auto loan options is essential in choosing the path that best suits your financial situation. Then you can get rid of that negative auto equity for good.

Determine the value of your car

Your first task in getting the good side of your loan is to determine the value of your car. Figuring out the exact amount between the value of your car and what you owe on the loan is essential to rectifying this situation.

Keep in mind that there are many factors that determine the value of a vehicle, and trying to figure out the value of your car on your own can get you crazy. Using an online used car valuation tool can help you determine your car’s value with confidence. Edmund’s Car Value Calculator takes into account the make, model, mileage, trim, depreciation and characteristics of your vehicle.

All you need to do is enter your vehicle identification number or license plate and answer a few questions about the condition and features of your vehicle. Be honest about the actual condition of your vehicle. There is no sense in minimizing any interior bumps, scratches, and tears in order to see a better assessment at the end of the process – the falsehoods will only slow you down in your efforts to reverse that loan inside out.

You will receive an accurate estimate of the value of your vehicle in about a minute. This estimate will serve as a guide for you to choose the best method to repair your reverse auto credit.

1. Trade in the car for a cheaper model

It is not a very sexy option. However, it is much more attractive than paying more for a car than it is worth in the market. Even if you potentially leave the car dealership with an older vehicle or more mileage, this option is certainly worth considering. Swapping your car at a dealership for a cheaper vehicle can eliminate the amount you owe on your current car that is more than the resale value.

This is how it works. Suppose you owe $ 17,000 on a car, but the car will only sell for $ 12,000. That leaves you with $ 5,000 in negative equity. You take your car to a dealership and trade it in for a car worth $ 7,000. By taking the value of your car ($ 12,000) and subtracting the negative equity ($ 5,000), you will get the price ($ 7,000) of the trade-in which will eliminate the amount you owe on your loan. the reverse.

It might not be the prettiest car of the lot, but it’s the only way to trade in while getting rid of the excess you owe. If all you do is convert the amount owed into a new car loan without a downgrade, you are essentially writing off the debt and eventually ending up upside down on your new loan.

2. Sell the car yourself

Many financial experts recommend selling the car yourself rather than going through a dealership. There are several reasons why self-selling works in your favor. Most importantly, by selling privately, you will avoid the bargaining process that inevitably accompanies selling to a reseller. When you can set your private selling price, which should be reasonably based on your car’s estimated value by Edmunds, you can get the most out of your vehicle.

Selling your car on a marketplace like Craigslist puts you in a prime position to get the best return on your vehicle and get as close as possible to the amount you owe on your underwater loan. However, there will likely be a remaining balance on your loan after the vehicle is sold. You’ll want to pay off this persistent amount as quickly as possible to avoid wasting money on an interest rate on a vehicle you no longer own.

The easiest way to get rid of an underwater car loan and move on with your life may very well be with another loan, surprisingly.

Related: Best sites to sell your car

3. Get a loan to close the gap

Compare credit institutions

Borrowing money to pay back borrowed money may seem counterintuitive, but there are ways to make this method work in your financial favor. First, find the right unsecured lender.

Platforms like Monevo put you in contact with lending partners who compete to be your loan provider. With several offers, you will be able to easily compare and select the loan with the best terms for you.

Related: How to get the best auto loan rates

Fiona is another loan platform option that uses proprietary financial technology to match your situation with the best loan organization.

Learn more: Fiona review: Loan offers in minutes

Find a loan with peer-to-peer loan

As an alternative to obtaining a loan from a financial institution, you can now turn to private lenders who are willing to offer you money based on your creditworthiness and financial situation. Through Prosper, the leading peer-to-peer lender in the United States, borrowers can apply for a loan of $ 2,000 to $ 40,000. Checking the rates you qualify for will not affect your credit score and, if approved, the funds will be in your account as early as one business day. Read more about this in our Prosper review.

Another P2P option is Loan Club. Similar to Prosper, borrowers can apply for up to $ 40,000 and choose a loan term of 36 or 60 months. Learn more in our LendingClub review.

Whether you go with a traditional financial institution or a peer-to-peer lender, the important part of your loan offer is the interest. Don’t pass out on an offer with a low monthly payment only. This lower monthly payment can also impose a high interest rate and a long term loan term. To improve your situation, the key is to select the loan offer with a lower interest rate than your current reverse auto loan.

4. Save money and pay off part of your loan

Suppose you do your due diligence and check out the loan offers that are available to you, but none of them have a lower interest rate than what you are already paying. The good news is, now you know you have the best deal available to get rid of that debt.

If you find yourself in this scenario, it is time for a period of austerity. You will need to find a way to pay off part of your reverse loan until the balance is cleared or until you have paid off enough that the car is worth more than you owe. If you’ve sold your car, hopefully the remaining balance isn’t too high, and you can quickly pay down debt and stop paying interest.

5. Do nothing

The simplest answer is also the riskiest. You may have noticed that your car’s resale value is less than your loan amount, but you are also confident in the reliability of your vehicle and have no desire to sell. Thus, you repay your loan as you normally would.

There is an inherent risk in this situation. If events governed by Murphy’s Law cause your vehicle to break down or you have an accident, then you will need to find a way to bridge that gap between what you owe and what your car is worth.

Ideally, you continue to make payments for your car as normal, perform routine vehicle maintenance, and drive regularly. Until one day, barring any accidents or unfortunate incidents, your loan is paid off, and it doesn’t matter that at some point you owe more on your car than it was worth.

Avoid a reverse car loan

Once you’ve gotten yourself out of the quicksand of a reverse car loan, finding yourself in the same situation is probably the last thing you want. There are a few factors that put you at high risk of unintentionally finding yourself underwater with a vehicle loan.

First, a minimal or no down payment can allow a car’s value to easily slip behind its depreciation rate. We’ve all heard of how a new car loses value as soon as you leave it, and it will continue to lose value at a rate of 10-15% each year thereafter. If you didn’t pay a large down payment when you signed up for the car, your car loan payments might not be able to keep up with the rate of depreciation. Once again, you are back in a reverse auto loan.

Of course, a high interest rate will increase your chances of reversing your loan. Don’t get dragged into a cycle where you throw money at an astronomical interest rate when your principal balance barely budges. Just because your principal takes longer to repay doesn’t mean the vehicle’s depreciation rate will slow down as well.

Final result

Finally, be wary of accepting a loan with a maximum loan term, for several reasons. Accepting the longest possible loan term means that your bank or financial institution is less likely to allow you to refinance that loan. Also, the longer the loan term, the more interest you pay over the loan term and less money will go to your principal each month compared to a shorter loan term.

By following our comprehensive guide to auto finance, you can drive your newly funded vehicle with confidence and have made the best choices for you and your new wheels.

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