An upside down car loan can be financially risky as it has no benefits and can hurt your pocket if anything happens to your vehicle. This will explain what these loans are, tips for avoiding them and how to get out of these loans.
What it Means to be Upside-Down
Upside down auto loans can be dangerous to your financial health. This is when the car loan is more than the current value of your vehicle. Sometimes it’s only by a little bit, but this could easily be for hundreds or thousands of dollars depending on the loan.
According to Lantern by SoFi, “if you have an upside down car loan, it can limit your car-related financing options.” This can also be bad if your car is totaled in an accident or if you buy a new car. You will owe the extra money to your lender even if the car is no longer in your name.
How You Get Upside-Down on a Car Loan
There are a few ways that you can get upside down auto loans. Sometimes this happens from the very beginning, but other times it occurs as the vehicle depreciates in value.
This can happen immediately from paying too much at the dealer or selecting long-term loans. Some people pay sticker price or pay too much at the dealer. This leaves you with a high price tag while the vehicle may not be worth that much. Long-term loans tend to cost more overall, which leaves you paying more than you should.
You can also become upside-down by not putting money down when purchasing the car. Vehicles on average lose 20 percent of their value shortly after being purchased and 50 percent by the third year. Your loans will be higher if you don’t put money down, so you can become upside-down after a few years.
How to Get Out of an Upside-Down Car Loan
There are several ways to escape an upside-down car loan. You can try refinancing or renegotiating your current loan to help balance it out. The best thing you can do is make as many payments as possible until the difference in your loan and the vehicle’s value balances out.
Selling your vehicle can also be a good idea. Keep in mind that you will still owe the extra money to your lender. It’s best to sell the vehicle privately as you will usually make more than selling to a dealer. This extra money can pay off the lender.
Tips for Avoiding an Upside-Down Car Loan
There are several tips for avoiding these loans. Whether you are buying new or used, it’s a good idea to follow the 20-4-10 rule. This means putting 20 percent down when buying the car, selecting a four-year loan at longest and the car payments and insurance cannot exceed 10 percent of your income.
You may also want to consider leasing if you only need the car for two or three years. This means you avoid the loan entirely.
An upside-down car loan can be bad for your financial health, but there are ways out. If you find yourself facing this type of loan, then be sure to correct it as quickly as possible.