What to Do When You Have an Upside Down Auto Loan

When you have an upside down auto loan, this means that the resale value of your car is less than what you owe on your loan. Although some dealerships offer to roll this debt over into your new car loan, this move can worsen your financial situation because you will be starting your next loan upside down as well.

Wait it Out

Unless you absolutely need to sell your car now, hold onto it and keep making payments until you are no longer upside down. Eventually, your monthly payment will reduce the principal by more money than the car drops in value during the month. If you hold onto the car until you finish paying off the loan, then you will be able to sell the car and keep the proceeds or use them as a down payment on your next vehicle.

Make Extra Payments

If you can afford it, make extra payments on your auto loan to reduce the amount you owe and get yourself out from being underwater. For example, make an extra payment of $200 each month for a year to reduce the loan balance by $2,400 more than what you would have if you just made your regular payments.

Sell to a Private Party

If you do have to sell your car when you are upside down on your auto loan, then sell your car to a private party. Your car can fetch more in a sale to a private party than what you can realize in a sale to a dealer. If you have time to place ads and meet with potential buyers, a private party sale could make up the difference if you are only slightly upside down in your payments. For example, if a dealership offers you $6,000 for your car and you owe $7,000 on it, try selling it to a private party for $7,000 instead.

Be Smart Next Time

When you finally get rid of your upside down auto loan, be smarter next time you buy a car. Make a large down payment of at least 20 percent of the purchase price to give yourself a cushion so you start with a loan amount well below the value of the car. Buy a used car instead of a new car so the car depreciates less quickly. Most importantly, choose a short loan term so your payments keep up with the rate of depreciation.