Upside down in your vehicle loan?

Man driving car looking worried

It can be frustrating to learn you’re upside down on your car loan, which is also known as having negative equity or being underwater. Being upside down on an auto loan means your vehicle is worth less than what you owe on it. Negative equity can impact your finances going forward, if you don’t right the ship and return to a positive state. Here are some options to consider.

What causes negative equity on your loan?

Depreciation is a key contributor to having negative equity in your vehicle. Your auto depreciates the minute you drive it off the lot. This means you’re losing value, right away. Other causes of negative equity could include a high interest rate on your car loan; financing the car for too long in relation to the value at the time of purchase; or rolling in extra fees and add-ons into the loan at the time of purchase.

How do I get out of a car with negative equity?

Restoring the equity in your loan begins with figuring out how far underwater you are. Start by subtracting the current balance of your car loan from the current value of the car. Contact your lender directly to get the payoff balance. Credit Union members have access to the National Automobile Dealers Association (NADA) Car Values just by logging in to Member Connect. Other resources such as Kelley Blue Book and Edmunds can also help you find your car’s value.

For example, you find your car is worth $10,000, but you still owe $15,000 on the loan. The result: You are upside down by $5,000. Remember, there are actions you can take to try to reverse negative equity.

Pay down your existing car loan

Look for ways to trim your budget and find extra cash. Consider small changes like eating out less and eliminating or reducing entertainment costs like TV, cable and cell phone. If you received a raise at work or a large tax refund, consider using some of that money to make extra payments on your existing loan to help you start building equity faster.

Consider refinancing your car loan

Finding ways to pay down your existing car loan before applying for another loan may net you enough money to close the gap between what your car is worth and what you owe. If you can’t and you’re still upside down on your car loan, refinancing your existing loan may be an option. A lender may be willing to approve you for another vehicle loan either at a lower rate, a longer payment period or both. Any one of these steps may be able to help you get to higher ground.

Avoid being upside down again

If you have a negative equity situation, consider the tips above to help turn things around. A better credit score may qualify you for more favorable rates on a New Auto Loan or Used Auto Loan next time. Also, when dealers and manufacturers are eager to sell cars, they offer pretty tempting rebates and other deals. These incentives could be enough to take a serious bite out of the new car loan.

Of course, your next ride could be a used or certified pre-owned vehicle or an older model year, to keep costs low. Further, consider whether it’s better to buy or lease your next vehicle. Lastly, try adding extra money to your loan payment to get your head above water sooner. It may not hurt to wait to buy your next car.

The advice provided is for informational purposes only. Contact your financial advisor for additional guidance.

The story was originally published in May 2014.

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