If you are upside down on a car loan you’re probably scared and a little freaked out, but fear not – lots of other consumers are in your shoes. Being upside down on a car loan simply means you owe more on the loan than the car is worth.
Given how quickly cars depreciate, it’s not difficult to get upside down in a variety of situations. Many consumers get to this point and don’t even realize it until they try to sell or trade in their car and discover that their loan balance far exceeds the value of the car.
Owing more than your car is worth is not necessarily a problem if you plan to keep the car throughout the period of your loan. But if you need to sell or trade it in, you’ll need to deal with the loan. Here are few options for what to do if you are upside down on a car loan:
Roll your old loan into a new car purchase. Some car dealers will allow you add the unpaid principal of your old car loan into the loan for a new car. You would, in effect, be paying off two loans. As you can imagine, this gets expensive and is not recommended, but if you have no other options then it may be worth exploring.
Refinance your car loan. While many people refinance home loans, not as many know that you can do the same for car loans. If you bought your car a few years ago you might find that interest rates now are much lower and you can save on your monthly payments. Just be sure that your current auto lender allows prepayment of your loan.
Make extra payments. You can pay down your car loan fairly quickly by making larger payments each month, but be sure that your lender has agreed that extra payments will go to pay down the principal owed.
Use a home equity loan to pay off your car loan. If you have access to a home equity line of credit, you can probably pay off your entire car loan at once. The advantage is that you immediately get yourself out from being upside down on your car loan and have 100% ownership. Repaying a home equity loan can also have tax benefits, so check with your accountant.