Getting Out from Underwater Car LoansLast Updated February 3, 2017
What exactly does negative equity mean? The term applies to loans where the value of a vehicle is less than the remaining loan amount. For example, if you buy a car for $10,000 and are offered $5,000 as trade-in value, but you still owe $7,500 against your loan, you’re underwater.
Factors like the rising cost of new cars, the slow rate of wage increases and the fact that fewer millennials are married and have a second income to help them with their car payments all contribute to the recent hike in underwater loans.
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How To Stay Above Water
The safest way to avoid a situation like this is not to end up underwater in the first place. If you’re in the market for a car and are planning to take a loan out to purchase it, be realistic about what you can afford to pay off. Making a larger down payment now could help you avoid the impact of a negative equity loan down the road.
Dealerships offer financing options that make it easy to drive home in a new car. Don’t fall victim to financing options that sound too good to be true. Avoid loans with particularly long terms — five years or more — visit multiple lenders to see where you can get the best rate and know what the cost to insure your new car will be.
Getting Out From Underwater
If, however, you’re already in a situation where you have to deal with a loan that’s gone “upside down,” there are methods to right your financial situation:
- Keep the car. The best choice is to keep the car — if not until your loan is completely paid off, at least keep the car until the loan is no longer underwater.
- Get a rollover loan. If you can’t see your way out of a bad loan through patience alone, you could try a rollover loan. This loan type is one way to eliminate negative equity, but be sure you understand the incentive. You could be getting swindled a second time.
- Refinance your loan or restructure your debt. Many lenders will allow you to refinance your rate, and this can be a good option if your financial situation is different from when you purchased the car or if interest rates have changed. You may even be able to restructure your debt, which is one way to obtain a lower interest rate if your credit score is high.
- Get a different loan to pay off your car loan. The last option you have is borrowing the money to pay off the loan. It’s certainly been done before, and there are lenders out there who can front you the cash, but think twice about your options and whether extending yourself on a loan again is the best choice. You could be headed right into another bad situation with this option.
Financing options make it possible for people to own cars that get them to work, transport children to school and bring home groceries. However, taking advantage of over-sold deals that are too good to be true is dangerous. Be smart in your next purchase by understanding the finances before you sign on the dotted line.
The costs of car ownership are many, but for millennials, just getting out from under the initial purchase price of their car is proving to be a challenge. Today nearly one-third of all cars in the states that are offered for trade-in are financed by negative equity loans. It's crazy to think, but it's true. Find out many ways to get out of your upside-down car loan or options to work yourself in the right direction over time.
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