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Upside Down Car Loan: What Do You Do?

written by: Valencia Higuera•edited by: Jason C. Chavis•updated: 6/23/2010

Owing more than a vehicle's worth is a common problem, and many people look for ways to reverse an upside-down car loan. Fortunately, there are ways to get around this problem. Here are a few tips to help you avoid an upside down car loan.

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      Nobody wants to deal with an upside down car loan. In a nutshell, upside down car loans occur when borrowers owe significantly more than their vehicle’s worth. Being in this situation makes it difficult to get rid of a car; and if you were involved in an auto accident, the amount you receive from the insurance company may not be enough to pay off the vehicle loan. But, there are ways to deal with this situation.

      Here are a few tips on how to handle an upside-down car loan:

      • Take steps to avoid an upside down car loan. Cars depreciate the moment they’re driven off a dealership’s lot. Therefore, there’s no way to completely prevent an upside-down car loan. Every car buyer will always owe a few hundred or thousand dollars more than their vehicle’s worth. However, if you want to avoid a significant difference between the loan balance and the vehicle’s worth, save money for a down payment. A down payment reduces the amount financed, lowers monthly payments, and may warrant a lower interest rate.
      • Don’t trade-in the vehicle. Auto dealerships never offer the full value on trade-in vehicles. As a result, borrowers have to include the negative equity from the old vehicle into their new car loan, which can quickly result in an upside-down car loan. Rather than trade-in the vehicle, sell the car yourself.
      • Make extra payments toward the principle. Increasing monthly car payments by as little as $50 is generally enough to reverse an upside-down car loan. Another option: make one or two extra car payments a year.
      • Refinance and reduce the loan term. Nowadays, it isn’t uncommon for auto buyers to finance their vehicles for 72 or 84 months. These loan terms offer lower payments, but they can also create an upside down loan. Evaluate your finances and determine whether you can afford a higher payment. If so, contact your lender and refinance the auto loan.