How To Get Rightside Up On An Upside Down Car Loan
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Here's a common scenario: You're shopping for a car. When it comes time to talk about your trade-in, the salesman informs you that you're "upside down" on your car loan. This means that you owe more on the car than it's worth. Lenders call this "negative equity".
However, before you take the salesman's word for it, go online and see what your car is really worth. The respected Kelley Blue Book now provides their service for free. You can find out your car's trade-in value, what it would be worth if you sold it yourself, and its suggested retail value.
Let's suppose that the salesman was wrong. You could print out your evidence and show it to him, but that won't guarantee that you'll get a better deal. Nowadays, new car buyers are usually more likely to get a good deal if they shop online than if they go in person to a dealership. You can learn more here.
Protect yourself against future negative equity by first getting the best possible price on a car, and THEN choosing the shortest loan term and highest monthly payment you can afford. You may also want to consider purchasing "gap insurance coverage", which protects you against negative equity problems should they occur. Don't buy this from the dealership. You can find out more here.
Now let's suppose that the salesman was right. You can probably still get that new car if you're willing to make higher monthly payments or accept a longer loan term. However, this really isn't a good idea. It pretty much guarantees that you'll be upside-down again when the time comes to trade the newer car... and your situation will be even worse.
A better choice would be to stick with your current car until you finish paying off the loan. And when you do, consider looking at used cars. A vehicle loses 30% of its value in the first year. In the second year, it still looks good and operates well, but costs a heck of a lot less!
If you're determined to buy new, some car dealerships offer cash rebates on new cars, payable to you when you close the deal. You could purchase your new car without a trade-in, then use the rebate to erase the debt on your old car. Just be aware that most rebates are under $2000, so this won't work for larger debts. Also, the larger the rebate, the more gas the rebated vehicle tends to use.
Once you've paid off your old car, consider selling it to a private individual rather than a dealership. You should able to sell it for much more.
Is your car still under warranty? See if the warranty will cover the necessary repairs. If not, try to pay for repairs yourself. Keep your car going until you pay off the loan.
If the car is falling apart for no good reason, you may have a lemon on your hands. Consumers who can prove they have a lemon may be able to get their car replaced at no cost. Read your state's Lemon Law statutes, get tips on proving your case and find lemon law attorneys here.
While you're at it, check the NHTSA's complaint database to see what problems others have had with your model vehicle.
If you don't have a lemon, but can't afford repairs, or if the car is totalled, see if you can get a consolidation loan from your bank and use it to pay off your car loan and credit cards. (Then close the credit card accounts or save them for emergencies only.)
Get the shortest possible term loan with the highest monthly payments you can afford. Sound familiar? You should be able to lower your overall monthly payments and maybe even get a lower interest rate this way.
What if you don't have any collateral with which to secure a loan? If you have an excellent credit history, you may be able to convince a locally owned bank or credit union to take a chance on you. Major lenders are less likely to "bend the rules".
Get copies of your credit report from the three major credit reporting companies: Equifax, Experian and Transunion. You can learn more here.
If you don't have any luck getting a consolidation loan, try to come up with enough money to buy a junk car that runs. "Runs" is the key word here. Have the car checked by a mechanic before buying. Also get a history report on the car you're considering. While it won't tell you everything about the car, it's still worth the small price.
Cars that are ugly, old or lack major features like air conditioning or radios will cost less.
Places to look:
- Craigslist
- Auto Trader
- Ebay Motors
- Around your neighborhood. Private sellers often put a 'For Sale' sign in the car's window.
- In your local newspaper. Be sure to look at ALL the passenger car listings, including in the Antiques/Classics section.
- Elsewhere online. Be cautious. Look at "certified" cars whenever possible, or find cars in your area so that you can check them out personally.
If all else fails, there are still ways to get around without owning a car. Learn about them here.
No matter what your situation, the most important thing to remember is this: Once you get right side up, don't ever let yourself get upside down again!
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