How to Get Out of an Upside Down Car Loan

An upside down car loan is one that is higher than the actual value of the vehicle. This is also called having negative equity in the car. It occurs because the value of a car decreases overtime, but the loan amount reflects the initial value. If you fail to pay the loan off as fast as the value of the car declines, you will end up with an upside down loan. Getting out of an upside down loan without losses is nearly impossible, but you can still exit the loan.

Selling the Car

One of the fastest ways to get out of an upside down car loan is to sell the car and pay off the debt. Of course, since the debt is worth more than the car is, you will have to pay an additional sum above the sales price of the car to totally close the loan. This will represent a loss for you. However, it is preferable to sell the car sooner rather than later to minimize the effect of that loss. If you wait even longer, the amount of negative equity you accumulate will continue to grow as you pay off the loan slowly.

Sourcing a New Loan

One way to get out of the loan without selling the car is sourcing a new loan. You will have to approach various lenders to ask for a quote to provide you with the cash to close out your existing loan. You will have the option of using the automobile to secure an additional loan in order to reduce the expense. Secured loans tend to cost less because they represent lower risk to the lender. Even though you can secure the loan, you should expect the cost to source a new loan, pay off your loan in full and transfer the car title to be rather high.

Modifying the Loan

You may contact your existing lender to attempt to modify your loan, but you should know the lender will be averse to most options you present. Since you are attempting to make the loan more favorable to you, it makes sense the lender will avoid the changes where possible. In order to get the lender to accept your offer, you will have to make it appealing for them. The best way to do this is to offer higher monthly payments without reducing your interest rate. In this manner, the loan will be paid off faster, reducing the negative equity that will accumulate on your car before the loan is paid off.

Settling the Debt

If you have the cash on hand to pay off at least a large portion of the remaining debt immediately, your lender may offer you a settlement. You will have to make the settlement payment immediately. Settlement may involve some penalties, and one possible penalty is a drop in your credit score. The lender will report you to the credit bureaus for closing a debt outside of your agreed contract. This can be worth it, however, if the savings are large enough.


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