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Get Out of an Upside Down Car Loan

Next to mortgage or rent payments, owning an automobile is the second largest household expense in the United States today. Gas, repairs and insurance can hit our wallets hard each month in addition to regular loan payments on the vehicle itself. And hidden within those loan payments, one cost that many of us may not be aware of is the impact of a car's value deprecation.

What is an Upside Down Loan

Within the first two years of ownership, cars can depreciate anywhere from 30 to 40 percent of their original value. Thanks to such high depreciation rates, many people find themselves in an “upside down car loan”, meaning they owe more money on their car than it is actually worth. Upside down loan situations frequently occur when people put little or not money down on the purchase of their vehicle, if their loan term is lengthy (5 years or longer) or has a high interest rate, or if they roll a previous car loan into their new loan.

Owners who are caught in an upside down loan have negative equity on their vehicle, meaning they have no ownership equity and closing the loan would require additional out-of-pocket expenses in addition to what has already been paid. If you find yourself in an upside down loan, you may want to consider selling your car and trading down for a much cheaper vehicle to get you around town.

Know the Value of the Car

Before you begin the process of selling your car to get out from under your upside down loan, the first thing you will want to do is figure out the current value of your vehicle using Kelley Blue Book (kbb.com). Using the make, model, mileage and current condition of your car, Kelley Blue Book can help you determine a price range to work with.

Once you have determined your car's estimated value, pick up a “for sale” sticker and start advertising online and in your local paper. And remember, you are likely to get more for your vehicle through private sales rather than selling to a dealership.

Finally, you may wish to consider financing the difference on what you owe. For example, if you $20,000 on a car that is worth $15,000, set up a meeting at your bank or credit union to discuss options you may have in financing the $5,000 difference. Although you will be taking on new debt, it is worth considering selling the vehicle and owing $5,000 versus $20,000. , contact Advantage Credit Counseling Service. Credit counselors at Advantage CCS can work with you to help you determine the best course of action for you and your current financial situation and needs.