How To Get Out of an Upside-Down Car Loan

Being in an upside-down car loan, also known as negative equity, means you owe more on your car loan than the vehicle is worth. This can be stressful, but there are ways to recover and regain your financial footing. In this article, our auto financing experts at Kiefer Mazda in Eugene, Oregon, break down what an upside-down car loan is, how it can happen, and several strategies to help you get out of it.

What Is an Upside-Down Car Loan?

An upside-down car loan occurs when the balance of your car loan is greater than the vehicle’s current market value. For example, if your car is worth $15,000 but you owe $20,000 on your loan, you have $5,000 in negative equity.

How Upside-Down Car Loans Can Happen

Several factors can contribute to finding yourself upside down in a car loan, including:

• Depreciation: A new car can lose up to 20% of its value within the first year. If your loan has low monthly payments or a long term, you may not be paying off the loan fast enough to keep up with the car’s depreciation.
• Low down payment: If you financed your vehicle with a small or no down payment, you start with a loan balance close to the car’s purchase price, but its value depreciates immediately.
• High interest rates: A high interest rate increases the amount you owe over time, making it harder to pay down the principal.
• Extended loan terms: Loans with long terms (72 months or more) make it easier to have low monthly payments, but they also slow down the process of building equity in the vehicle.

Now that you understand how upside-down car loans happen, let’s discuss how to get out of one.

How To Get Out of an Upside-Down Car Loan

You don’t have to stay stuck if you’re upside down on your car loan. Here are several strategies to help you get out of negative equity and regain control of your finances.

Pay Off Your Loan

An effective way to resolve negative equity is to pay off your loan as quickly as possible. Paying down the principal reduces the gap between what you owe and the vehicle’s worth. These strategies can help you pay off negative equity on a car:

• Make extra payments: Whenever possible, put extra money toward your monthly payments. Be sure to specify that the extra funds should go toward the principal, not just interest.
• Round up your payments: If your payment is $325 per month, round it up to $350 or $400. These extra payments can make a big difference over time.
• Use bonuses or tax refunds: Any extra income, such as a tax refund or work bonus, can help you reduce the loan balance faster.

Refinance Your Loan

Refinancing your car loan could be a good option if you’re upside down but still want to keep the car. By refinancing, you may be able to lower your interest rate or extend the loan term, making it easier to manage your payments. Here are ways to refinance your vehicle loan:

• Shop for better rates: If your credit has improved since you first took out the loan, you may qualify for a lower interest rate, which can help you pay off the loan faster.
• Be cautious of extended terms: While extending the loan term can lower your monthly payments, it may also increase the total interest you pay. Consider the potential pitfalls before choosing lengthy loan terms.

Sell Your Car

Selling your vehicle can also be a way out of an upside-down loan. However, if you have negative equity, you’ll still owe the difference between the loan balance and the car’s sale price. Here’s how to sell a car with negative equity:

• Cover the difference: If you sell your car for less than you owe, you’ll need to pay the lender the difference out of pocket. For example, if you owe $20,000 but sell the car for $15,000, you must pay the remaining $5,000.
• Use an upside-down car loan trade-in: Some dealerships will allow you to trade in the car and roll the negative equity into a new loan. While this can be convenient, it means you’re starting your next loan already upside down, which could lead to further financial trouble.

Surrender Your Car

If your financial situation is dire, you may consider voluntary repossession or surrendering your car to the lender. While this option can relieve you of your monthly payments, it will severely affect your credit score and may still leave you with a large debt if the lender sells the vehicle for less than you owe. Here are the steps involved in surrendering a car:

• Contact your lender: Explain your financial situation and discuss your options for voluntary repossession.
• Prepare for financial consequences: Even after surrendering the car, you may still be responsible for any remaining balance on the loan after the car is sold.

This option should be a last resort, as it can significantly impact your credit and financial standing.

How To Avoid Being Upside Down on a Car Loan

Once you’ve gotten out of an upside-down car loan, it’s important to prevent this situation from happening again. Here are a few key strategies:

• Make a larger down payment: Putting down at least 20% of the car’s purchase price can help you avoid negative equity.
• Choose a shorter loan term: Opt for a loan term of 60 months or less to build equity faster.
• Get a preowned car: One advantage of preowned vehicles is that they’re already depreciated. If you can find an affordable option and pay a substantial part of the down payment upfront, going the used car route can help you avoid getting into an upside-down car loan situation.
• Hunt for favorable rates: Take your time to research different lenders, at least three, and choose the one with the most favorable car loan terms to make it easier to build equity in your vehicle.

Get in Touch With Kiefer Mazda

If you’re struggling with an upside-down car loan, Kiefer Mazda in Eugene, Oregon, is here to help. Our finance experts can guide you through refinancing, trading in, selling your car, or applying with subprime credit. We’ll help you find the best solution to eliminate negative equity and regain financial stability. Contact us today to learn more about your options.

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