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Upside Down Car Loan – What to Do?

Currently, nearly two-thirds of all car owners are upside-down on their loans. There are many factors that contribute to that, but the main ones are higher vehicle prices, lower down payments, and longer loan terms. When you are upside-down on a car loan you have a few options open to you.

Rolling Balance into a New Vehicle, a New Loan

Your first option only pertains to purchasing a new vehicle. You can roll the negative equity over to the new vehicle. Obviously, that means you will be immediately upside-down on the new vehicle. Lenders may offer long loan terms for the new loan. That could get you a lower monthly payment, but you will also be upside-down on the new loan for an even longer amount of time and subject to a higher interest rate. The combination will cost you thousands of dollars over the life of the new loan.

Making Extra Payments

The quickest way to get to some sort of parity between the value of your vehicle and the loan balance is to make extra payments. For many people making a full monthly payment is impossible to do, but breaking that payment down isn’t. Divide your monthly payment by twelve and pay that amount on top of your monthly payment. So a $200 a month payment becomes $216.67. This eats into the principal slowly, but lets you pay less interest over the life of a loan. It also allows you to make a total of 13 payments each year, bringing you toward positive equity in your car more quickly.

Refinancing at a Lower Rate, with a Shorter Term

Another option is to find a specialty lender that is willing to take a risk on a car with a high loan-to-value(LTV) ratio while offering a shorter loan length. This will your increase your monthly payments and will probably come with a higher interest rate, but you will achieve positive equity more quickly.

Keep Driving Your Car Until It’s Paid Off

All in all, being upside down on your vehicle is predominantly an issue if you…

  • Get into an accident that totals the vehicle.
  • Want to trade in the vehicle before it’s paid off.

As long as you have proper insurance coverage, you can simply plan to drive your vehicle until it’s paid off. Negative equity may not be a very comfortable position to be in, but over time, your payments will catch up with depreciation, and you won’t be trapped underneath your vehicle.

About the Author

The author has many years of experience in automotive finance and insurance. However, each consumer's situation is unique. It is best to contact a finance specialist for further assistance.
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