What to Do to Get Rid of an Upside Down Car Loan?

Because cars lose value over time, especially when they are new, people who purchase cars with a car loan may find themselves owing more on the loan than the car is actually worth. This is because the car depreciates in value faster than the owner pays down the principal balance on the loan.

Definition

An upside-down car loan is one in which the current market value of the car is less than the outstanding balance on the loan. For example, you may have bought a car for $20,000 and taken out a loan for the full amount. Two years later, the remaining balance on the loan is $18,000, but the car will only sell for $15,000. This car loan is now considered to be upside down.

Time Frame

Because new cars depreciate more quickly than old ones, the car loses more value per year during its first couple years than during subsequent years. In addition, because monthly payments on a car loan go toward interest before paying down the principal, payments in the early stages of the loan have less of an impact on the principal balance than those at the end of the loan repayment. People with an upside-down car loan can get right-side-up eventually by keeping the car and continuing to make payments.

Extra Payments

Making extra payments on the car loan can help speed up the process of getting rid of the upside-down loan situation. People who get a holiday bonus at work or a tax refund check could put those directly toward the car loan. Another idea is to get an extra job for a while and put that money toward the car loan.

Immediate Solution

For someone who cannot afford the monthly payments or wants to get rid of the car, the best option is to sell the car and get a personal loan to pay off the part of the car loan that its sale price does not cover. If a replacement vehicle is necessary, get an extra $3,000 in the personal loan and use it to purchase an inexpensive used vehicle. Selling the car to a private party by advertising through the newspaper or with signs in the car's window will get a better price than a dealership trade-in.

Warning

Although some car dealerships may be willing to let someone who is upside down on a car loan trade in the vehicle and take out a new loan that includes both the old loan and the new vehicle, this is not a good idea. Rolling the old loan into a new one will only make the problem worse because you will still be upside down in your new loan and the new vehicle will depreciate more quickly than the old one did.