UNDERSTANDING AN UPSIDE-DOWN CAR LOAN AND HOW TO GET RIGHTSIDE-UP

Posted by Malini Somra on October 2nd, 2019

An upside-down auto loan is also referred to as a negative equity. An upside-down auto loan is when the amount you owe on the loan is higher than the current market worth of your car. This will work against you if you wish to change your car. There are several things you can do to avoid or come out of a negative equity; one of it is to consider refinancing your loan or make extra payments.

Situations That Can Lead to an Upside-down Car loan

•              Little or no Down Payment: Not making a down payment or making small down payment can result in an upside-down car loan. According to Edmunds, the recommended down payment on a car should be at least 12% which may be okay for a used car but might not work for a new car because a new car depreciates faster in its first year by at least 20%.
•              Long Duration Loan: The longer the loan term, the more difficult it is to build equity. Spreading your loan for a long time means you are giving room for the car to depreciate while you are still paying debt on it, in the process you will be spending more on the car due to wear and tear.
•              Depreciation: Cars are depreciating assets and as such they lose value over time. For example, new cars depreciate faster at 20% in their first year, and by the third year, they would have lost over 40% of their value. This can easily push you into negative equity and you struggle to build equity.
•              Overpaying: Another scenario that can lead to an upside-down auto loan is when you pay more than the car is worth at the time of purchase, this will only magnify the effect of depreciation over time.
•              Add-ons: Optional features and add-ons such as service contracts can increase the cost of your purchase and this will automatically add to the size of your debt.

How to Come out of an Upside-down Loan or Negative Equity

•              Refinance your Loan: Apply for refinancing to see if you can save more at a reduced interest rate, although you might have to pay more monthly.
•              Repay your Loan Faster: You can pay more on your monthly payment if you have the means, this will help you to pay off the loan as fast as possible. Another way to do this is to make a down payment in order to make the loan amount shorter and also get lower APR and interest rate.
•              Sell Your Car Privately: Selling your car privately will enable you make more money than selling to a dealership. Although, you may have to handle the paperwork by yourself in this case.
•              Wait to Attain Positive Equity: Ask yourself if you really need to change your car, if you can still make do with your current car, why not wait to attain positive equity? Wait until you have paid a significant amount on your current car to buy another one and go for something you can afford.

In order to know if you are upside down on your car loan, ask your lender to have more information or log into your account to have an idea of your outstanding balance and check the worth of your car on Kelly Blue Book, NADA Guides, or Edmunds.

Car loan buying on leasing - http://autoloanrefinance.angelfire.com/cars-buying-or-leasing.html