How to Get Out of an Upside Down Car Loan

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Refinancing your loan, selling the vehicle, or making more payments are ways you might get out of an upside-down car loan. You can have negative equity when you have an upside-down car loan, meaning you owe more than the car is worth. However, selling the car or refinancing the loan are two of the most popular strategies for handling negative equity.

How to Get Out of an Upside Down Car Loan

Moreover, you can consider trading in your car for a new model, but consider rolling over the previous loan amount to avoid additional auto loan debt. Also, defaulting on an upside-down vehicle loan can negatively affect your credit and make it harder to secure future auto loans. In this article, we will discuss the concept of how to get out of an upside-down car loan and how to avoid it.

How to Get Out of an Upside-Down Car Loan

To start the process of refinancing an upside-down car loan, you must first determine your negative equity. To achieve this, deduct the remaining balance from the car’s value. Moreover, you may use industry publications such as Edmunds or Kelley Blue Book to find the worth of your vehicle.

After figuring out your negative equity, you can use one of the following approaches:

Pay off your loan

You can pay off your debt more quickly if you are currently in arrears. Also, make additional payments to expedite the payback process if your budget permits it. Moreover, you may be able to reduce your interest costs throughout the loan. Furthermore, paying off your loan before the term ends can save money, but it’s crucial to read the loan contract to avoid penalties for early repayment.

Refinance your loan

You may wish to refinance your auto loan if you don’t have the extra money to pay it off sooner. To pay off your previous car loan, you need to obtain a new loan with better terms and lower interest rates. Refinancing your auto loan can expedite debt payment, although it doesn’t eliminate negative equity. Moreover, this is true if you qualify for a lower annual percentage rate (APR) than you presently pay.

Sell your car

You can consider selling your automobile if you wish to get to something less costly. Despite obtaining enough money from a private sale to pay off both loan debt and negative equity on your automobile, there is still potential debt remaining. Also, selling a car with negative equity can be challenging, especially if you still owe money on it. Furthermore, you must speak with your lender about the requirements of the sales process before you sell.

Surrender your car

Returning the car to the lender is the act of surrendering it. Although it’s not ideal to give up your automobile, voluntary surrender is a preferable choice to having your car repossessed. Therefore, you can still be liable for the remaining amount if your lender repossesses your automobile and the sale doesn’t pay off the outstanding debt. Lastly, repossession might also seriously lower your credit score.

What is An Upside-Down Car Loan

You owe more money than the car is worth when your auto loan is upside-down. It’s also known as a negative-equity auto loan or being underwater on the loan. Therefore, you are to pay $2,000 upside-down if your automobile is worth $10,000 then your loan debt is $12,000. In addition, if you decide to sell or trade in your car, you will need to pay the lender $2,000 as additional fees.

It’s sometimes referred to as negative equity. Furthermore, your automobile turns into an asset and gives you greater financial flexibility if you have positive equity, which means you owe less than its market worth. Remember that there is no exact science involved in estimating the worth of your automobile. Whether you sell it to a private-party buyer or trade it in will also affect its value.

How to Avoid an Upside-Down Car Loan

Here are some preventative measures you can take, whether you already own a car or are shopping for your ideal vehicle, to keep your auto loan upside down:

Do your research

Before visiting your Winthrop neighborhood dealership, thoroughly research all possible prices to ensure financial stability. Being upside-down on your loan when you drive off the lot is the last thing you want to happen. To avoid overpaying for an automobile, consider using websites like Kelley Blue Book to determine its genuine value.

Select the shortest repayment plan.

Select the shortest repayment plan you can afford. Your loan might be repaid more quickly and at a cheaper interest rate if your repayment schedule is shorter.

Thinking About Leasing Instead of Financing

Leasing a car is a better option than financing one if the driver doesn’t intend to retain it for an extended period. Since you won’t have a loan when you lease an automobile, you cannot go into default.

Final Thoughts

To get out of an upside-down car loan, consider paying off the loan by making extra payments, refinancing the loan for better terms or lower interest rates, selling the car to pay off the loan, or surrendering the vehicle to your lender. Moreover, the best approach depends on your financial situation and desired timeframe.