4 Tips for Handling an Upside Down Auto Loan

Being upside down in an auto loan means the amount you owe on your car is more than the vehicle’s current value. If you sold the car, you would owe the difference between the sales price and the outstanding loan balance. It’s a situation that about 40 percent of car owners with loans on their cars face. And the average amount of the upside down auto loan is more than $2,000. The following information offers tips on what to do if you are in this situation and how you can avoid it in the first place.

Ride It Out

The simplest way to handle an upside down auto loan is to keep your current vehicle and pay the loan off. At the end of the loan term, your balance is zero, but your car will still have some value. If you have gotten into and upside down auto loan, it is rare that you must sell the car. Unless you can literally afford to pay the difference, it will almost always be more economical to keep an older model car until the loan is paid. At this point, maintaining your car well can save you hundreds in repair costs as well.

Don’t Default

As uncomfortable as it might be to be in an upside down auto loan, it is better than giving the car back to the lender. If you do, you still owe the loan balance in excess of the car’s value. If you cannot pay that off and are in default, it puts a negative mark on your credit history and lowers your credit score.

Know What You’ve Got

If you are in an upside down auto loan, take no action until you are completely familiar with the terms of your current note. If you are considering paying off the note - either with another loan or by trading for another vehicle - there could be early payment penalties. It is possible to refinance your note or to trade the car in on a car of lesser value and add the amount by which you were upside down to the new note. But beware, the terms of your first note must allow this, and you are very likely to be upside down in the new vehicle as well.

Avoid the Problem

If you have yet to finance your car, avoid the following three common mistakes which can easily lead to an upside down auto loan.

  • Low Down Payment - The lower your down payment, the larger your loan balance. That means there is a larger gap between the car’s value and its loan balance as depreciation begins.
  • Too Long a Payoff - A five- or six-year loan means you will still have a significant balance when the car’s value has dropped to very little.
  • Low Introductory Offers - The low-payment offers create initial savings which is tacked on to the out years of the loan. You’re still paying the same amount, only the amount will be larger for the later years you are paying off the car when the car has lost most of its value.

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