Do you owe more on your auto loan than your car is worth?
When the market value of your car is less than the amount you owe, you are “upside down” or “underwater” on your auto loan.
If you still owe $30,000 on an automobile you want to sell or trade. trade in , but the most you’ve been offered is $20,000. That’s $10,000 in cash. negative equity you’ll have to deal with. But how?
Regrettably, there is no one-size-fits-all answer to this difficult financial scenario.
Automobile owners who are underwater may be forced to choose between making monthly payments while possibly losing equity and selling the vehicle and absorbing the loss.
Yet, these are not the only alternatives. While repaying the full balance on your car loan may be inevitable, some ways of dealing with an upside-down car loan are better than others.
The best course of action may ultimately be determined by your budget, credit, and the time period in which you would want to repay the loan.
On that topic, let’s take a look at four measures that might help you figure out the best way to deal with your underwater debt.
- Calculate your negative equity
- Reach out to your lender
- Take on a new loan
- Consider getting rid of your car
Calculate your negative equity
Begin by establishing how deep you are underwater. This can be done by subtracting the estimated value of your car from the remaining loan balance you owe.
Do you know how much your automobile is now worth? The Federal Trade Commission suggests checking these resources to help you figure out the value of the car.
- National Automobile Dealers Association Guides
- Kelley Blue Book
When it comes to, there is no one official source. car valuation . We recommend checking more than one of the above resources to get a better idea of your car’s actual value.
To calculate the loan balance, subtract the amount you’ve previously paid toward the loan from the overall loan amount.
If you conduct your homework and discover that the market worth of your automobile is about $15,000. If your loan balance is $20,000, you are $5,000 underwater. In other words, you have a $5,000 deficit.
Before you seriously consider selling your car or refinancing your auto loan , consider if it is within your financial capacity to pay off that debt. negative equity . If you’re able to pay a lump sum without taking on more debt or jeopardizing your other assets, this is likely your best option.
Reach out to your lender
If you are unable to pay off your negative equity in one fell swoop, you still have various options to explore.
The next step is to contact your lender. Describe your position and inquire about potential possibilities for resolving the underwater debt. Even if the lender insists there are no alternatives, it never hurts to inquire.
If there is flexibility in your budget to make additional payments toward your principle each month, inquire about this option. Paying extra will help you get out of the debt sooner and may enable you to pay down the sum at a faster rate than your current rate. car’s devaluation .
Although you will still have to pay off your loan and cover your negative equity, retaining your car and paying off your loan might help you make the most of a bad situation.
That may be more unpleasant in the near term, but you’ll have some equity to deal with when it comes time to buy a new car.
Take on a new loan
Is your lender unwilling or unable to help you get above water on your current loan? If you have strong credit, refinancing at a reduced interest rate may be the best option.
When refinancing an upside-down loan for a reduced interest rate, it is critical to search for the right loan terms .
Low monthly payments may entice you, but they lengthen the life of a loan and may result in greater negative equity.
Vehicles depreciate rapidly, losing roughly 20% of their value in the first year and up to 50% to 60% after five years, so the sooner you pay off the loan, the less likely you are to fall underwater again.
Am I more likely to go underwater on a longer-term auto loan?
Stretching out the terms of your loan can help you afford a more expensive car in the short term, but it can expose you to long-term risk. If you wish to buy a new automobile, you may be forced to pay off a big chunk of your loan after the value of your current vehicle has drastically depreciated.
Consider getting rid of your car
“The greatest method for getting back on your feet is to abandon plans for a new automobile and stick with the one you have.” But if you’ve explored all other options and don’t see a way to catch up with your car’s depreciation, it may be time to say farewell.
If you’re set on selling your car , concentrate on obtaining the best possible pricing. This will help you cover more of your loan balance.
Cleaning the vehicle and making any required mechanical modifications will help bring in higher bids, but if your money is limited, try giving it a nice wash and polish at the very least.
Trading your car in While trading in your car for a new set of wheels may be appealing since it saves you time and effort, trade-ins often bring in less than private listings.
Remember that you’ll still need to pay off the amount on your present loan. Most likely that balance will be rolled into your new car loan, heightening the risk of going underwater again.
Private sellers should consider using online resources to save money and reach the widest audience of potential buyers. Try contacting your personal network and putting classified advertisements on free online classified sites such as Craigslist.
If a private sale isn’t the right option for you, consider trading in your car that has an outstanding loan balance for a leased vehicle. The amount may be accounted for in the lease.
While leasing “You won’t have to worry about any resale value difficulties since the vehicle goes back to the dealership at the conclusion of the lease,”
Keep in mind that you will still be accountable for covering the negative equity you’ve accumulated.
Attempting to get out of an underwater vehicle loan may be quite frustrating.
It’s critical to avoid being impulsive while deciding how to get out of an auto loan. Trading your vehicle in may get you your next car faster, but it doesn’t get you out of repaying your debt.
Rather of looking for a fast but expensive answer, weigh all of your alternatives to choose the best repayment arrangement for you.
This might imply contacting your lender and requesting assistance in the form of an enhanced repayment plan or a refinanced debt. It could also mean paying off your negative equity in a lump sum or switching to a lease so you don’t find yourself in the same situation again.
Whichever choice you pick, knowing your alternatives will help you make the greatest use of your time and money as you strive to turn around your underwater debt.
How can I get rid of a car loan without ruining my credit?
Getting Out of an Auto Loan
- If you want to maintain your present automobile but want a different auto loan, refinancing is the way to go.
- Trade in or sell the vehicle – To get out of an auto loan contract without ruining your credit, you could sell the vehicle and use the proceeds to pay off your lender.
What is the fastest way to pay off a 10000 car loan?
How to Pay Off Your Car Loan Early
- PAY HALF YOUR MONTHLY PAYMENT EVERY TWO WEEKS.
- ROUND UP.
- MAKE ONE LARGE EXTRA PAYMENT PER YEAR.
- THROUGHOUT THE TERM OF THE LOAN, MAKE AT LEAST ONE LARGE PAYMENT.
- NEVER SKIP PAYMENTS.
- REFINANCE YOUR LOAN.
- DON’T FORGET TO CHECK YOUR RATE.
What happens if a financed car breaks down?
You’re still liable if the automobile breaks down and can’t be driven. The great majority of automobile loans are just that: loans. The credit union provides the loan in good faith, and you are expected to repay the money on time – regardless of the vehicle’s condition.
How can I trade my car in if I still owe on it?
If, on the other hand, you owe more than the automobile is worth in a trade-in, you have negative equity. The dealer still pays off your original loan, but they’ll require you to pay them the difference in cash, or they’ll offer to roll the difference into your new loan.
Will CarMax buy my car if its not paid off?
Will CarMax buy my car if I owe on it? Yes. You must give loan details so that CarMax can repay the lender. If you owe more than your offer, you must make up the difference.
Makenzie Berke is Interior Repair Manager at ColorProTech. He writes about technology, answer questions about car topics that people want to know