Being upside down on a car loan, when you owe more than the vehicle is worth, is a common problem for vehicle owners. On the downside, it’s easy to get caught out by one or more of the following: rapid depreciation in your car’s value; a small down payment; too long of a loan; a rollover loan; overpaying for the car, or add-ons bumping up the price. On the upside, there are several ways back to positive equity. Consider these options to reach a firmer financial footing.
Add to your monthly payments
One solution to an underwater loan is to pay down the principal balance more quickly. This can be achieved in a number of ways, including putting extra cash toward your monthly payment or making a lump sum payment. Contact your lender or log into your online account to see what may be possible.
Pay more frequently
More frequent payments will also help. Try splitting your monthly payment and paying half every two weeks, which effectively adds up to another full payment by the end of the year.
Refinance your loan
Apply for refinancing to see if you can get a shorter loan. While it will typically come with a higher monthly payment, it will allow you to pay off the note faster. Use an auto refinance calculator to work out what you can afford, and check your credit score to make sure it hasn’t taken a knock before you apply. If you’re approved for a lower rate, you could save on interest, too.
Hold onto your car
The simplest course of action may be to keep your car, maintain regular payments and wait until your debt dips below the vehicle’s value. The rate of depreciation, which is steepest in the early years of ownership, will affect how long it takes. New-car values fall by about 30 percent in the first 12 months, and experience another notable drop at year four, according to Edmunds. If you pay off the car completely, you’ll have more equity to put toward your next ride.
Sell your car privately
You could sell your car and use the proceeds to help pay off your loan. In this case, a private sale will usually get you the highest price. Remember, though, that you’ll have to cover the remaining loan balance, and plan for other means of transportation.
Trade in carefully
There are a number of things to keep in mind when trading in. If you’re rolling the outstanding balance into a new loan, and increasing the size of your debt, consider budgeting the cost to make sure you can keep on top of it. Pay particular attention to the monthly payment and loan duration within your new agreement. A longer loan to keep payments down is enticing, but the shorter you can keep it, the sooner you can get to positive equity.
Explore auto refinancing with RoadLoans
Refinancing is a convenient way to tackle an upside-down loan, and if you think this option is right for you, learn more about an auto refinance with RoadLoans. As a full-spectrum lender, we accept applications from consumers with a broad range of credit and offer our customers a streamlined process. To start, it takes just a few minutes to apply online, and we provide instant decisions. If approved, then complete and return the forms and let us handle the rest. We’ll get in touch with your current lender to pay off your loan so you can enjoy fresh terms better suited to you.
These statements are informational suggestions only and should not be construed as legal, accounting or professional advice, nor are they intended as a substitute for legal or professional guidance.
RoadLoans is not a credit counseling service and makes no representations about the responsible use of or restoration of consumer credit.
Written by:
With 10 years of experience in auto finance, Rob Looker helps car shoppers find the right vehicles with the right financing so they can enjoy the road ahead. When he’s not creating content, he’s often behind the wheel, exploring new…
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