It’s usually a good thing when something grows three sizes, like the Grinch’s heart. But when something drastically shrinks, like the value of your car, then you get into trouble. If you have a car loan, you may owe more than its original value, and that’s called “being upside down”, which gives you a financial headache.
If you have a variable interest rate, you can take an even bigger hit. No one likes seeing the cost of a loan shoot up, but sometimes you end up paying more than the car is worth without noticing.
Alas, there’s not much room to negotiate in an upside down car loan — reselling the car won’t cover the entire loan, and refinancing the vehicle for lower payments won’t work if your credit’s taken a hit. How do you get out of an arrangement causing you more trouble than it’s worth?
How You Got Into an Upside Down Car Loan
To find your way out of an upside down car loan, you have to work out how you fell down this proverbial rabbit hole. Consider the true value of a car before you fall into common car buying mistakes:
- A cars’ value quickly depreciates within the first three years of ownership. When you put a small amount down on a vehicle, you’re already in debt when you drive it off the lot. You end up owing almost the full sticker price, for a car worth a few thousand less than what you paid.
- Make sure to do your research before you buy You’ll easily overpay if you invest more than the fair market value or a car dealer takes advantage of the situation.
- Those luxury extras you add on to the vehicle only increase your perceived value, not the actual value of the car.
- Some borrowers try to get out of another upside down car loan by jumping into a new loan. Many dealers will roll over the shortfall to the new car without notifying you.
Read everything carefully, because anyone can fall into these sticky situations. Sometimes, being “upside down” is temporary and acceptable when you have a good deal on a car loan. If you make timely car payments, the loan expense and value of the car eventually reach an even balance.
The problem becomes serious when monthly payments become a struggle or you suffer a job loss or other major financial shift. You’re not alone. Thirty-two percent of all cars offered for trade-in for a new car are already underwater, and the average buyer is down by $4,832. You could keep the car, sell it, pay down the debt or borrow the difference. The decision is important and needs to be made wisely and promptly.
Getting Out of an Upside Down Car Loan
Trying to get out of your loan may make you feel like an escape artist. Sacrifices and hard decisions will have to be made to pay the debt down. You can get out of this situation and get ahead on your car payments by doing the following.
1. Get a Credit Line
Instead of a new car loan, move your debt to a personal credit line. If you have a payment over $500, your bank may offer a more manageable monthly payment and interest rate on a $5,000 line of credit. You’ll also buy yourself extra time if the rate is less and truly works for your budget. If your APR is much less or even zero percent on transferred debt, take advantage and pay more into it now.
Check with a local credit union about obtaining a personal loan or line of credit for less. Peer-to-peer lending may also be an option if you can’t go the traditional route.
2. Raise The Money
Declutter your home to sell objects you don’t need that will help pay down the car debt. You may need to sacrifice bigger-ticket items, like electronics, to pay off debt with an urgent due date. Consider online yard sale groups on social media or apps to sell clothing or electronics, such eBay.
Though it won’t cover all of your debt, selling the car is still an option to raise a few thousand dollars quickly. Your car will depreciate in value after purchase fast. Make this decision wisely.
3. Get A Side Gig
The need for more income signals the need to obtain additional employment. Apply for a second job in retail, food service or customer service. Pet sit or take care of your neighbor’s kids for a little extra on the side.
This opportunity may also push you to start your own side business by writing articles, designing websites or selling your crafts. What talent do you have that people would pay you card hard cash for?
Being upside down on a car loan presents the challenge of overcoming a tough financial situation and come out better on the other end, with a more reliable and affordable car and perhaps your own business making a great side income. When you owe more debt than you planned, the key is to stay vigilant, motivated and organized. Think uniquely and strategically to get out of this sticky situation.