An upside down car loan is a situation where you owe the lender more than the value of the vehicle. This is also referred to as negative equity. An upside down car loan can happen to anyone. According to Lantern by SoFi, automobiles lose up to 20 percent of their original value as soon as they are driven out of the showroom.
Car owners who are underwater may find themselves in a dilemma of either selling the car and bearing the losses or opting to make regular payments while probably losing equity. However, those are not the options available. Despite the fact that repaying the full loan balance may be difficult, there are some methods of dealing with upside down car loans that are better than others.
Here are the things to do after an upside car loan:
- Calculate your negative equity
The first thing to do is to find out how far underwater you are. The best way to do this is to subtract the estimated value of the car from the remainder of the loan balance you owe the lender. If you are not sure of your current worth, you can check either the Edmunds, National Automobile Dealers Association Guides, or the Kelley Blue Book.
It is important to note that there is no single source that’s authoritative as far as car evaluation is concerned. That’s why experts recommend that you check more than one resource mentioned above to have a better clue of your car’s valuation. For you to know your loan balance, deduct the amount you have already paid from the original loan amount.
- Reach out to your lender
If you are not able to pay your negative equity as expected, then there are several options you can explore. Talk to your lender and explain your financial situation. Find out if there are any alternatives to turning around the underwater loan. Even if the lender refuses to offer you a favorable option, it won’t cost you anything to ask.
- Take a new loan
If your lender is unable or unwilling to assist you to get out of the underwater loan, then you have to seek other options. In case you have a good credit history, refinancing the loan at a lower interest rate can be a great idea. When considering refinancing upside down loans, it is important to look for the right loan terms.
Sometimes you might be tempted to jump on low monthly payments, but this is not the right move as this can result in more negative equity.
- Consider getting rid of your car
According to Lantern by SoFi, the best way of getting above water is to abandon plans to buy a new car and stick with your current one. If it is a must for you to sell your old car, then try as much as possible to fetch the highest price.
In a nutshell, an upside down loan can happen to anyone. The most important thing is to know what to do in order to overcome it.
