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.

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In this article

    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.

    Lending Partner
    Min. Loan
    APR Range
    Term
    • LightStream
      Min. Loan
      $5,000
      APR Range
      2.49% – 9.49% w/AutoPay
      Term
      24–84 months
      Learn More
      on lender’s secure website
    • PenFed
      Min. Loan
      $500
      APR Range
      Starting at 1.39%
      Term
      36–84 months
      Learn More
      on lender’s secure website
    • Auto Credit Express
      Min. Loan
      N/A
      APR Range
      N/A
      Term
      24 – 72 months
      Learn More
      on lender’s secure website
    • MyAutoloan
      Min. Loan
      $7,500
      APR Range
      3.49%–21.08%
      Term
      24–72 months
      Learn More
      on lender’s secure website
    • CarsDirect
      Min. Loan
      N/A
      APR Range
      3.00% – 12.90%
      Term
      24 – 72 months
      Learn More
      on lender’s secure website
    • Auto Credit Express
      Min. Loan
      N/A
      APR Range
      N/A
      Term
      24 – 72 months
      Learn More
      on lender’s secure website
    • CarsDirect
      Min. Loan
      N/A
      APR Range
      3.00% – 12.90%
      Term
      24 – 72 months
      Learn More
      on lender’s secure website
    • LightStream
      Min. Loan
      $5,000
      APR Range
      2.49% – 9.49% w/AutoPay
      Term
      24–84 months
      Learn More
      on lender’s secure website
    • MyAutoloan
      Min. Loan
      $7,500
      APR Range
      3.49%–21.08%
      Term
      24–72 months
      Learn More
      on lender’s secure website
    • Penfed
      Min. Loan
      $500
      APR Range
      Starting at 1.99%
      Term
      36–84 months
      Learn More
      on lender’s secure website
    • LightStream
      Min. Loan
      $5,000
      APR Range
      2.49% – 9.49% w/AutoPay
      Term
      24–84 months
      Learn More
      on lender’s secure website
    • LightStream
      Min. Loan
      N/A
      APR Range
      2.49% – 9.49% APR w/AutoPay
      Term
      24–84 months
      Learn More
      on lender’s secure website
    • MyAutoloan
      Min. Loan
      $7,500
      APR Range
      3.49%–21.08%
      Term
      24–72 months
      Learn More
      on lender’s secure website
    • PenFed
      Min. Loan
      $500
      APR Range
      Starting at 1.39%
      Term
      36–84 months
      Learn More
      on lender’s secure website

    Jason Lee

    Contributing Writer

    Jason Lee is a U.S.-based freelance writer with a passion for writing about dating, banking, tech, personal growth, food and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill sets with the rest of the world. Follow Jason on Facebook here

    Reviewed by

    • Andrea Perez
      Andrea Perez
      Personal Finance Editor

      Andrea 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.