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What Is an Upside-Down Car Loan?
Being upside-down on a car loan is not an ideal place to be, but it’s somewhere that a lot of car owners find themselves today. If you’re reevaluating your finances, looking to sell your car or considering a refinance auto loan, you may be curious about what it means to be upside down on your loan or how to get out of an upside-down car loan. Thankfully, even though it’s not an ideal place to be, there are ways out that start with fully understanding the situation.
What does it mean to be upside down on a car loan?
The term upside-down car refers to auto loans where you owe more money to the lender than the asset is currently worth. For example, if you owe $6,000 on your car loan, but your car is only worth $3,000, you are considered to be upside down. If you were to sell the car and get the full value, you would still owe money to the lender.
Getting upside down on your car loan can happen much easier than you might expect. Unlike other assets like houses, cars don’t grow in value over time. As time passes, the car depreciates or becomes worth less and less. Some of the ways you can slide into an upside-down car loan include paying too much for a car by not researching before the purchase, making too small of a down payment, rolling an existing car loan into a new purchase or when you lose your job and get behind on payments.
[Read: The Simple Dollar Guide to Auto Loans]
How to know if you’re upside down on your car loan?
Finding out if you are upside down on a car loan is a fairly easy calculation and requires you to know two variables — what your car is worth and how much you owe on your loan. Then you subtract how much you owe on your loan from the car’s value. If you are left with a positive number, you are not upside down. If you get a negative number, though, you are upside down on your loan.
For example, let’s say your car is worth $4,500, and you owe $3,800 on your loan. In this situation, you have $700 of equity in your car, which is the amount above being upside down or above underwater you are. If you do find yourself underwater or upside down, there are ways of dealing with it proactively.
How can I get out of an upside-down car loan?
Just because you are underwater on your car loan does not mean that you are at immediate risk. What it means, though, is that if something happens where you need to get out of the loan, you will owe money. Because of this, it is smart to proactively try and get out of an upside-down car loan as quickly as possible.
The exact course of action you choose will depend on your goals, time frame, how far underwater you are and whether or not you want to keep the car.
[Read: Best Bad Credit Car Loans for 2020]
If you want to keep the car
- Make larger payments towards the principal every month.
- Make more frequent payments towards your principal.
- Find a second stream of income to put towards paying down your loan.
- Negotiate to restructure your payment plan with your lender.
- If payment sizes are a problem, refinancing a car with negative equity may be an option.
If you want to get rid of the car
- Sell the car and take out a personal loan to cover the negative equity costs.
- Negotiate repayment options with your lender.
How to avoid an upside-down car loan
The best way to get out of an upside-down car loan is to avoid putting yourself in that position in the first place.
- Put down a larger down payment or wait until you can put more down.
- Research the value of the car you’re looking to buy before purchasing.
- Purchase a less expensive car that allows you to put a higher percentage down.
- Choose loan terms that help you stay ahead of depreciation.
What are auto loans?
For most people, a new, used or certified pre-owned car purchase requires financing help. An auto loan is a borrowing tool that allows you to get the money you need to make your car purchase now. In return for accepting the upfront cash, you agree to repay the loan with interest and fees in smaller monthly payments. Auto loans are available through the car dealership, at your local bank, through credit unions or online lenders.
The cost of borrowing is comprised of your loan amount, interest costs and the length you choose to repay your loan. These factors help to determine your monthly payment, as well as your total cost of borrowing.
- Loan amount – The loan amount is the dollar amount you need to borrow to cover the cost of your car purchase. You can figure this amount by subtracting your down payment from the total cost of the car.
- Annual percentage rate – Also known as APR, this metric tells you the most realistic look at what your loan will cost you every year. APR is comprised of your interest costs, as well as any applicable loan fees you are required to pay.
- Loan term – Your loan term is how long you choose to repay your loan. The longer the term, the smaller your monthly payments, but the higher your overall total costs.
Best auto loans of 2020
Staying above water starts with choosing the right loan terms from the right lender. With a lot of great options in the market, you’ve got plenty of high-quality lending choices. Additionally, many of these lenders are willing to work with borrowers with less-than-great credit scores.
- LightStream
Min. Loan$5,000APR Range2.49% – 9.49% w/AutoPayTerm24–84 monthsOffer Details
Disclaimer: Your loan terms, including APR, may differ based on loan purpose, amount, term length, and your credit profile. Excellent credit is required to qualify for lowest rates. Rate is quoted with AutoPay discount. AutoPay discount is only available prior to loan funding. Rates without AutoPay may be higher. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice.
Payment example: Monthly payments for a $10,000 loan at 4.99% APR with a term of 3 years would result in 36 monthly payments of $299.66
© 2020 Truist Financial Corporation. SunTrust, Truist, LightStream, the LightStream logo, and the SunTrust logo are service marks of Truist Financial Corporation. All other trademarks are the property of their respective owners. Lending services provided by Truist Bank.
- PenFed
Min. Loan$500APR RangeStarting at 1.39%Term36–84 monthsOffer Details
New Auto Loans: Loan rate applicable to new vehicles only. New vehicles are where you are the original owner and the untitled vehicle is a current (2020) or prior model year (2019). Up to 110% financing is available. Vehicle weight restrictions apply. Minimum loan amount is $15,000 for 61-72 month term. Rate also depends on term.
Used Auto Loans: Maximum used car loan advance will be determined by PenFed using a NADA value. Financing is available up to NADA average retail value plus tags, title, taxes and extended warranties not to exceed 110%. Some restrictions apply. Call 1-800-247-5626 for details.
Financing for 61-72 month term is valid for model years 2015 – 2020. Rate depends on term. Other restrictions including vehicle and mileage limitations may apply.
Refinance Auto Loans: New vehicles are where you are the original owner and the vehicle is a current (2020) and prior model year (2019). For used vehicles, maximum used car loan advance will be determined by PenFed using a NADA value. Up to 100% financing is available to qualified members. PenFed does not permit internal refinances of an existing PenFed auto loan.
- Auto Credit Express
Min. LoanN/AAPR RangeN/ATerm24 – 72 monthsOffer Details
- Bad Credit Auto Loans
- $5,000 to $45,000 Approvals
- No Credit Rejected
- Get Financing for a New or Used Car
- Apply & Drive Today!
- MyAutoloan
Min. Loan$7,500APR Range3.49%–21.08%Term24–72 monthsOffer Details
- You and/or co-qualifier must be at least 18 years of age; Minimum income: for Purchase, Private Party and Lease Buyout loan types, $21,000 Gross Yearly Income; for Refinance loan type, $18,000 Gross Yearly Income
- Lives in a state where we are currently doing business, (we are in 48 states, not in Alaska or Hawaii) – Minimum Vehicle Requirements: 125,000 maximum mileage; 10 years old or newer
- Minimum Loan Amount: for Purchase, Private Party and Lease Buyout loan types, $8,000; for Refinance loan type, $5,000
- FICO scores of 575 or greater
- Applicant has not submitted a loan offer form in the past 31 days for the same loan type
- Customers intent when submitting the loan offer form was to finance a new or used vehicle or refinance an existing vehicle
- CarsDirect
Min. LoanN/AAPR Range3.00% – 12.90%Term24 – 72 monthsOffer Details
- Rates as low as 0% on select cars, trucks and SUVs
- Free Online Quotes – Get Your CarsDirect Target Price Today
- Local dealers compete to provide the best rates for both new and used vehicles
Too long, didn’t read?
An upside-down car loan is when you owe more money to your lender than you could sell the car for. The more significant the difference, the further underwater you are and the bigger risk you carry of financial issues. Luckily, there are plenty of options to get out of being underwater and not drown in payments.
We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.
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Reviewed by
Andrea Perez
Personal Finance EditorAndrea Perez is an editor at The Simple Dollar specializing in personal finance. Prior to that she specialized in digital marketing content for online learning websites. She holds a master’s degree in journalism and media studies from the University of South Florida.
