Upside Down Auto Loans

What is an Upside Down Auto Loan?

Being upside down on an auto loan means that your loan exceeds the current value of your car; in other words, you owe more on your automobile than it is worth.

Of course, nobody wants an upside down loan. It is really discouraging to find out that the car you want to trade in is worth $5,000 while you still owe $8,000 for it. However, the statistics shows that about 40% of the American car buyers end up being upside down on their auto loans.

So how did so many consumers get in such a situation?

How do Car Buyers Become Upside Down?

The answer is simple: most upside down consumers have underestimated the importance of making a large down payment (at least 20%) and have tried to lower their monthly car payments as much as possible by unreasonably extending their auto loans to, say five or six years.

Add to this the steep depreciation of new cars and there you go - you are building equity at a slower rate than your vehicle depreciates.

How to Avoid Getting Upside Down on Your Auto Loan?

Avoiding upside down auto loans is not that difficult. Here are four simple advices to follow:

• Make a big enough down payment so that you will have equity in your car.
• Don't extend your auto loan term too much just to lower your monthly payments.
• Keep you vehicle as many years as possible; don't rush into buying a new car before you have accumulated equity in the car you own.
• Consider buying a used car; new cars depreciate much faster and carry greater risk of getting upside down on the auto loan.

How to Get Out of an Upside-Down Car Loan?

If you are already upside down on your auto loan there are some steps you can take to reduce the damage.

To start with, the best thing you can do is to keep your car and pay off your loan as quickly as possible.

If possible, try to shorten the term of the loan by increasing your monthly payments. Additionally, make an extra car payment whenever you can.

Consider refinancing if you can arrange a lower interest rate. Refinancing at a lower rate will allow you to make the same monthly payments and at the same time pay down your auto loan principal faster. You may also consider the option to refinance your car loan with a home equity loan, since home equity loans usually carry a lower interest rate.

The auto loan calculators and the information available on this site are intended to serve only as general guidance regarding auto loans. Since they do not take into account your individual circumstances, we cannot and do no guarantee their accuracy or suitability to a specific purpose. We highly recommend you to consider the appropriateness of any information to your objectives before acting on it, and encourage you to consult a qualified professional regarding you particular personal situation.

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