Upside down car loans is simply when you owe more on the loan then the car is worth. Some people buy a car when they still owe more on their previous car. So, the dealership is happy to oblige by tacking on the negative amount to the new loan. Don’t fall for this trap. Let’s first talk about how to avoid it completely and then how to work your way out of it if you are in this situation.
- Don’t buy a car unless you can make a good down payment. I want to pay all of the extra taxes and fees plus 10% minimum. This means you might have to wait a few more months to purchase a car. Start saving the amount of your car payment every month.
- Research and find the best deal. Dealerships often focus only on the payment amount. You should know exactly what you are paying for the vehicle up front. Research online and you will learn what you should be paying for the car you want.
- Know your interest rate. Download a loan calculator app, like LoanCalculator0/00, before you go to the dealership. If you plug in the amount of the loan, the number of months, and the rate, this app will show you your monthly payment amount, total interest, and total amount you will pay on the loan. You should know if you could get a lower interest rate elsewhere. Always make loan decisions with as much information as possible.
- The last way to avoid getting in to a negative equity situation, is to always make extra payments on your loans. If I get paid every other week, I get two extra paychecks a year. An easy way to pay the loan faster, is to pay two extra payments a year.
If you’re already in this unfortunate situation, here are my tips to getting out.
- Start by paying extra payments. I have a loan template that makes it easy to see how quickly you can pay off your loans if you pay extra payments. I will e-mail it to you in google sheets so that if you send me your e-mail.
- Wait. Don’t buy that new car just yet. When you’ve overspent on another car, you will need to be patient, pay extra payments and wait until you can get out of the car loan without having the negative equity added to your next loan. Most dealerships will require you to upgrade in order to add the negative equity amount on to your new loan.
- Take care of your vehicle. While you’re waiting, maintain and be careful with your vehicle. If something happens while you’re waiting, you might not have any choice.
- Try to sell the vehicle yourself. When you trade in your vehicle, the dealership will pay a low, wholesale price for the vehicle. If you look on Kelly Blue Book, you might be able to sell the vehicle by yourself for more money. However, if you owe more than you sell the vehicle for, you will need to pay the extra amount immediately.
When making any financial or budgeting decision, you need to have information and understand what you’re paying, for how long you will be paying, and if you could do better somewhere else. Dealerships only care about their bottom line and sales. Negotiations are difficult but showing up with information gives you more power. Also, be prepared to walk away if you think you can do better somewhere else. Good luck in your car buying experience.