How to Get Out of an Upside Down Car Loan
Car payments can make up a significant portion of your monthly bills, taking a noticeable chunk out of your budget. It’s entirely possible to find yourself in a car loan that’s upside down, thanks to changing interest rates, where you car isn’t worth nearly as much as you are paying for it. Before you try to get out of paying your car loan, review your budget and reassess whether you can afford your car.
Review Your Car Loan Terms
There are three basic things you need to know before digging up your loan terms. First, the principal is the amount of money you borrowed on the loan to pay for the car. Basically, whatever the car was being sold for, minus a down payment.
The interest is what you pay on top of the principal — the price of borrowing from the lender. This is expressed as an annual percentage rate, or APR. For example, if you had a $10,000 loan and an APR of 3 percent thanks to a super prime credit score, you would pay a total of $10,781.40 over the term of the loan, thanks to interest.
The term is how long the loan lasts — usually about 36 months for a used car, 60 months for a new car.
Once you know these, you can calculate your remaining balance, based on your term. This assumes you are only paying what is required each month. If you pay more per month than required, in the end, you will actually end up paying less, as interest is calculated every month.
Finally, once you have calculated how much you have left to pay, look at what your car’s market value. Use resources like local ads, Kelly Blue Book, or Edmunds to determine what your car can sell for. If it’s less than what you owe, then you are upside-down in your loan. It’s important to know that if this is the case, and you are trying to get a new car, you will not be able to get out of the loan, and get a new car, and cost you no money, and not harm your credit score. Depending on what option you take, you may get some, but not all of these.
How to Get Out of a Car Loan
Sell Your Car to Another Driver
Your first option is to sell to another driver. The major problem is unless they are made legally responsible for the loan, it’s still your problem. If they don’t pay, you are still responsible for the loan, and the fees and hit to your credit will affect you, not the new owner. In this case, you want to try to get as much money as possible by selling and pay back the loan in full. Or, you can call your loan lender and get the loan transferred.
Sell Your Car to a Dealer or Retailer
Selling to the dealer or a retailer, such as Carfax, means you will get a no-hassle offer. If it’s more than what you owe on the loan, the retailer will pay off the loan, and you pocket whatever is left.
Call Your Lender to Negotiate
If you have consistently made payments on time and have a good credit score, refinancing for a new, better interest rate may be possible. This can lower monthly payments, though it causes a hard inquiry, which will lower your credit score a few points for a few months.
You can also call and ask to skip a month, if that will help your financial situation. While not ideal, your lender may take pity on you if you explain your situation, and not put your account into default if you ask to skip a month. Save the money; you’ll need it to pay next month’s payment.
Trade Your Car In
Your last option is to trade in your car for another one. This should only be done if you have positive equity on the car, as whatever you have to put towards your new car comes from the trade-in of your previous car. If you have negative equity, the dealership will add that on to your new loan, meaning you’ll pay more thanks to interest. This is the worst-case scenario.
How to Get Out of an Upside Down Car Loan
Selling may not solve your problems — and you may struggle to sell a car with an upside-down loan on it. A better question than “How do I get out from under a car loan” is “How do I mitigate the damage from negative equity?”
Calculate Negative Equity
If you haven’t already, calculate how much negative equity you have — that is, the difference between what you can sell your car for on the market and how much your loan is worth. Depending on how much you are upside-down, you have a couple options.
Lease a New Car
While trading in a car, as mentioned above, is a worst-case scenario, leasing a car when you have negative equity on your current car can help you in the long run. You will see lowered car payments, with your negative equity rolled into the total you owe. The pro is you get a new car and lowered payments. The con is you don’t own the car; leasing is essentially borrowing or renting the car. You will eventually have to either buy the car when your lease is up, or turn it in. Note that insurance for leased cars is often higher than cars you have a loan to own.
Negotiate and Refinance Before Declaring Bankruptcy
If leasing is not an option, but you have high credit, refinancing may be able to help mitigate the negative equity. If you are able to negotiate a better interest rate, it can get you closer to breaking even, or, in some cases, get you from the red to the black.
However, should refinancing still not do enough, and negotiating doesn’t work, you might need to declare bankruptcy. This will, overall, do less damage to your credit than continually missing payments and going into default. Make no mistake — declaring bankruptcy, in all likelihood, will lower your credit. This is the worst case scenario if your loan is upside down, but it could be a necessary step. If your bankruptcy requires you to make payments, they will likely be less than you are paying for your car loan.
Getting out of an upside down car loan is not easy, and you will likely not come out financially unscathed. However, there are ways to lessen the blow, and possibly even come out with a small amount of money in hand. In general, if there is a way to avoid defaulting on your car loan, you should go with that option, as it will be better than defaulting and going to collections.
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A former newspaper journalist, Cole spends his free time reading, writing, playing video games, watching movies, and learning about every subject under the sun. He lives with his wife and daughter in Idaho. Follow Cole on Twitter: @ColeMayer42
This post was updated February 2, 2018. It was originally published February 5, 2018.