What Does Being Upside Down on a Car Loan Mean?
If you owe more on your car loan than your car is worth, you’re said to be “upside down” on the loan, or “underwater”.
These names all refer to the concept of negative equity, meaning that the value you hold in the vehicle is less than what could expect to be matched upon the vehicle’s sale.
That being said, having an upside down auto loan can make it difficult to qualify for new financing. If you’re upside down on your loan and considering trading in your car, be sure to talk to your dealer about options for minimizing the impact on your finances.
How Does a Car Loan Become “Upside Down”?
There are a few different common causes that lead to being upside down on a loan. This can occur if:
- You make a small down payment
- You finance the loan for a very long loan term
- Accelerated depreciation on your vehicle’s value
Whatever the reason, it can put you in a difficult financial position if you need to sell or trade in your car before the loan is paid off. That’s because you may end up owing more than the car is worth and will have to come up with the difference out of pocket or rolling it over into your new loan and incurring even more in interest charges.
Avoiding Getting Upside Down in Your Auto Loan
Preventing a situation in which you’re upside down on your car loan is all about effective planning and weighing your options before signing your loan. You’ll need to make sure that you get into a vehicle and a financing situation that you’re comfortable with, can afford to make the monthly payments, and your vehicle will retain its value.
- Choose a loan with a term that is no longer than the expected lifespan of the car
- You can make a sizable down payment to reduce the amount you need to finance
- Be aware of changes in the market value of the car so you can adjust your loan accordingly
By doing your research and finding a dealership that can best work with your needs, you can put yourself in a better position to have positive equity in your vehicle and avoid an upside down car loan.
What are Your Options With an Upside Down Car Loan?
When many car buyers find themselves in an “upside down” situation, where they owe more on their car loan than the car is worth, they want to know what their options are and how to best deal with the situation. There are a few different options available to these borrowers.
One option is to trade in the car for a new one and roll over the negative equity into the new loan. This can be a good option if the borrower is happy with the trade-in value of their car and is interested in upgrading to a new model. However, it can also end up costing the borrower more in the long run if they’re not careful.
Another option is to sell the car and use the proceeds to pay off the loan. This can be a good option if the borrower can find a buyer willing to pay enough to cover the loan balance.
Finally, some borrowers may be able to refinance their loan at a lower interest rate, which can help reduce their monthly payments and free up some extra cash.