Being upside down in a car loan means you own more than your vehicle's worth for your car loan. This is not unusual for newly purchased vehicles; it can take several years to even out value and loan amount if you didn't offer a down payment or take advantage of rebates.
Determine Your Vehicle's Value
Since several avenues exist for ending your car loan, you must determine your vehicle's value. Use the Kelley Blue Book website, Edmunds.com and the NADA Guides website to determine the vehicle's value; use a median value from all websites for a reasonable expectation. Check private sale and trade values; the two options for ending your loan. If your trade value is only $1,000 off, it may benefit you to trade the vehicle if you want a new car. If you find you're thousands off, a private sale may prove the better option.
Your Loan Payoff
You must pay off your car loan to get out of your vehicle. Whether you sell your car or trade it in to a dealer toward another purchase, you must obtain a lien release to officially transfer your car's title. If you find your value is too far off from your loan amount to sell your car, you may want to make a plan to increase your car payments and establish equity. Some of your car payment goes toward your interest payment, unless you financed a zero-percent loan. Try to make extra payments toward your loan's principal to pay down your car loan. Talk to your lender to discuss its early payoff process.
Trade or Sell Options
If you decide to sell your vehicle privately, you'll have to come up with the loan's balance after the sales price to fully pay off the loan. If trading your car to a dealer, it can help you pay off the loan with minimal down payment requirements. You can transfer your negative balance to another loan or shop for a new car with sufficient rebates to help decrease your down payment needs. Most states offer a tax discount when a buyer trades a car toward another purchase; so you may save thousands in tax charges depending on its value and your area's tax rate.
Future Financing
Avoid becoming upside down in a car loan in the future. Shop for a low interest rate; keep in mind that your rate can cost you thousands over the term of your loan, making it harder to trade out of the car because of interest charges. Do not finance extra purchases; items like taxes, fees and aftermarket purchases, such as an extended warranty, often result in an upside down car loan. Shop for a new car with rebates if possible and avoid rolling money over to a loan.
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