How to Get Out of a Car Loan When You’re Upside Down

Do you owe more on your auto loan than your car is worth?

Going “upside down” or “underwater” on your auto loan happens when the market value of your vehicle is less than the amount you owe.

For example, say you still owe $30,000 on a car that you’d like to sell or trade in, but the most you’ve been offered is $20,000. That’s $10,000 in negative equity you’ll have to deal with. But how?

Unfortunately, this stressful financial situation doesn’t have a one-size-fits-all solution.

Car owners who are underwater may be torn between two undesirable options: making regular payments while potentially losing equity, or selling the car and eating the loss.

But those aren’t necessarily the only options. While repaying the full balance on your car loan may be inevitable, some ways of dealing with an upside-down car loan are better than others.

The wisest course of action may ultimately depend on your budget, your credit and the time frame in which you’d ideally like to pay off the loan.

Here are 4 steps that can help you determine the best option for dealing with your loan.

1. Calculate your negative equity

Getting out of an upside-down car loan means making some difficult decisions. Depending on your financial resources and time frame, you may want to refinance your loan or pay off your negative equity in a lump sum.

Start by determining how far underwater you are. This can be done by subtracting the estimated value of your car from the remaining loan balance you owe.

Not sure what your car is currently worth? The Federal Trade Commission suggests checking these resources to help you figure out the value of the car -- National Automobile Dealers Association Guides, Edmunds, or  Kelley Blue Book.

You can also use Autolink on our website, www.wkfcu.org to find the current fair market price of a vehicle.

There’s no single authoritative source when it comes to car valuation. You may want to try more than one  to get a better idea of your car’s actual value. To determine the loan balance, you need to subtract the amount you’ve already paid toward the loan from the original total loan amount. You can call the the credit union and ask for a payoff on your loan.

Let’s say you do the research and learn that the market value of your car is roughly $15,000. If you owe $20,000 on your loan, then you are $5,000 underwater. 

Before you seriously consider selling or refinancing, ask yourself if it’s within your financial means to pay down that negative equity. If you’re able to pay a lump sum without taking on more debt or jeopardizing your other assets, this is likely your best option.

2. Reach out to your lender

If you’re not in the position to pay down your negative equity in one fell swoop, you still have several alternatives worth considering.

Contact your lender and explain your situation and ask about any options it may offer to help turn the underwater loan around. 

If there’s room in your budget to pay extra money toward your principal each month, ask about setting up this option. Paying extra will help you get out of the loan faster and may allow you to bring down the balance at a rate that outpaces your car’s devaluation. While you’ll still have to cover your negative equity, keeping your vehicle and paying off your loan can help you make the best of a bad situation. It may be more painful in the short term, but at least you’ll have some equity to work with when you shop for a new vehicle later.

3.  Take on a new loan

You might consider refinancing at a lower interest rate but be careful.

When refinancing an upside-down loan for a lower rate, it’s important to search for the right loan terms. You might be tempted by low monthly payments, but lower payments extend the life of a loan and could lead to more negative equity. 

Cars tend to depreciate in value rather quickly, losing about 20% of their value in the first year and up to around 50% to 60% after five years, so the faster you’re able to pay off the loan, the less likely you are to go underwater again.

Am I more likely to go underwater on a longer-term auto loan?

Stretching out the terms of your loan can help you afford a more expensive car in the short term, but it can expose you to long-term risk. If you want to purchase a new vehicle, you may be stuck paying off a large portion of your loan after your car’s value has significantly depreciated. 

4. Consider getting rid of your car

According to Edmunds, “the best strategy for getting above water is to scrap plans for a new car and stay with the one you have.” But if you’ve explored all other options and don’t see a way to catch up with your car’s depreciation, it may be time to say farewell.

If you’re set on selling your car, focus on getting the highest price. This will help you cover more of your loan balance.  Detailing the car and making any necessary mechanical improvements can help bring in better offers, but if your budget is restrictive, consider at least giving it a good wash and wax.

Trading your car in for a new set of wheels may be tempting since it saves you time and hassle, but trade-ins typically bring in less than private listings. Also, remember that you’ll still have to cover the balance on your current loan. Most likely that balance will be rolled into your new car loan, if that is even possible,  heightening the risk of going underwater again.  Private sellers should consider using online resources to save money and reach the widest audience of potential buyers. Consider reaching out to your personal network and posting classified ads to free online sites like Craigslist. 

Next steps

Trying to escape from an underwater car loan can be incredibly stressful.  When making a  decision about how to get out of a car loan, it’s important to avoid being impulsive. Trading your vehicle in may get you your next car faster, but it doesn’t get you out of repaying your debt.

Rather than search for a quick but costly solution, consider all of your options to find the best repayment method for you.

If you are “underwater”  or “upside down” on a vehicle loan you have at WKFCU, you should make an appointment to discuss your options with a loan officer. We will help you find the best solution for you.

(Partially reprinted from Creditkarma.com)