When people shop for a new vehicle, there is a 40 percent chance they owe more on their old vehicle's loan than the car's fair market value, according to the financial website Bankrate.com. This is known as an "upside down" auto loan and occurs mostly because cars depreciate as much as 50 percent during the first two years of their life. Sometimes the best option is to stick with the status quo.
Keep It
Auto loan experts, such as Philip Reed, senior consumer advice editor for Edmunds.com, believe the best course of action for an upside down vehicle loan is to stay put. You cannot hand the keys over to the bank, and even if you total the vehicle in an accident, the insurance company only pays for the value of the vehicle, not the loan. Having an underwater loan does not harm your credit score as long as you keep up with your bills.
Sell It
Selling the car for as much as you can get to a private party should net you the best return, but avoid buying a new vehicle right away. Pay off the rest of the balance so you can shop for a new vehicle without the pressure of paying for a car you no longer own. Some auto loan agreements stipulate that you must pay off the loan upon sale of the car. The bank may turn the deficient balance into a personal loan if you have good credit.
Roll It Into a New Auto Loan
One of the worst options for a borrower burdened by a depreciating car is adding the upside loan to a new vehicle loan. Dealers often agree to take a vehicle and pay off the old loan as part of a deal to sell the customer a new car. This does little to alleviate your situation and usually makes it worse, because the dealer typically adds the negative equity to the price of the new car and you have another vehicle loan to pay.
Tip
The Financial Web website recommends purchasing gap coverage for your vehicle. Gap coverage pays for any deficient balance if your vehicle is in an accident. Say you have $15,000 left to pay on a vehicle worth $10,000, and the car is totaled in an accident. Gap insurance covers that extra $5,000 you owe to the bank. In the future, consider buying a used car, put as much down as possible and finance with a loan with the largest monthly payment and shortest life.
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