Sarah T.
Does it ever feel like you’re paying more for your car than it’s worth? You might be in what’s called an upside-down car loan—owing more than your vehicle’s current value. This can happen due to fast depreciation, high-interest rates, small down payments, or lengthy loan terms. Acting sooner rather than later can help you avoid bigger financial troubles down the road.
In this article, we’ll share how to handle an upside-down loan and get yourself back on track.
What is an Upside-Down Car Loan?
The phrase “upside-down” might conjure up images of a car doing a flip on the freeway. And that’s definitely not something we want to imagine. In reality and everyday terms, being upside-down means you owe more on your loan than what your car is actually worth. So, if your car’s market value is $10,000 but you still owe $12,000, that extra $2,000 is called negative equity.
Definition & Important Terms
- Equity: The difference between what you owe and how much the car could sell for.
- Negative equity: When the loan balance is higher than the car’s current value.
- Loan-to-value ratio (LTV): A percentage comparing your loan balance to the car’s actual worth.
How It Happens
- Depreciation: Vehicles lose a chunk of their value the moment you drive off the lot.
- Financing too much: Rolling taxes, fees, or a tiny down payment into the loan can push the balance above the car’s value.
- Rollover debt: If you owed money on a trade-in, adding that leftover amount onto your new loan can put you underwater fast.
When you’re upside-down, it becomes harder to sell or trade the car without taking a financial hit. You might owe money even after the sale, which is a tough spot to be in if you’re already trying to manage tight finances.
Assess Your Situation
Maybe you suspect you’re upside-down on your car loan but aren’t totally sure. Don’t worry—it’s easier to figure out than you might think. Here are three steps to help you find out where you stand:
- Determine Your Car’s Current Value: Consult resources like Kelley Blue Book, Edmunds, or NADA Guides to see what similar cars are selling for. These estimates give you a ballpark figure of your vehicle’s worth.
- Calculate How Much You Owe: Check your most recent loan statement or contact your lender to get your outstanding balance.
- Identify the Gap: Compare the loan balance to your car’s value. If the balance is higher than the estimated value, you’re dealing with negative equity.
Strategies to Get Out of an Upside-Down Car Loan
Being upside-down on your car loan can feel like carrying extra baggage. You’re essentially stuck paying off more than your car is worth, which can be stressful if you need to trade in, sell, or reduce monthly expenses. Below are some approaches that might help you regain control.
- Pay Down the Loan Faster
Paying extra toward the principal is a useful way to reduce the gap between what you owe and what your car is worth. Even smaller amounts add up over time. Another idea is switching to bi-weekly payments, which can chip away at interest and get the loan down faster.
- Refinance Your Auto Loan
Finding a loan with a lower interest rate or shorter term can shrink monthly payments and overall costs. This move works best if your credit score has improved since you first signed for the car. Make sure you compare different lenders to see if refinancing is a practical choice.
- Sell the Car Privately
Selling your car yourself often brings in more money than a trade-in at a dealership. This helps close the gap between what you owe and the sale price. Be prepared, though: if the sale price still doesn’t cover your entire loan balance, you will have to pay the leftover amount on your own.
- Trade In for a Less Expensive Car
Trading in for a cheaper vehicle can be a possibility, but watch out for rolling negative equity into the new loan. That leftover amount will still need to be paid off. This approach may be an option if it significantly reduces your monthly payment and fits your overall budget.
- Consider a Personal Loan
If you qualify for a personal loan with a better interest rate, you could combine the amount owed on your car plus any negative equity into one single loan. This might simplify your payments and possibly lower your rate, but be sure to look at all the numbers before deciding.
- Voluntary Repossession (Last Resort)
If you can’t keep up with payments and no other routes are open, returning the car might be the final step. However, this will impact your credit history for years to come and could result in extra fees. Only go down this road if you’ve exhausted all other options.
Ready to Move Forward?
An upside-down car loan doesn’t have to define your finances forever. By trying new methods—like selling the vehicle yourself, making extra payments toward your balance, or looking into auto refinance possibilities—you may take back control and avoid more headaches down the road.
If you’re unsure where to begin, RateWorks can connect you with lender options that fit your situation. Whether you decide to shorten your term or aim for a lower rate, RateWorks has what you need to make an informed decision. Get a free quote today and start turning things around!
