Upside Down in Car Loan Payments

An increasing number of car loan borrowers today get upside down on their auto loans. What does being "upside down" mean and why is it so hard on your wallet?

Being upside down on a car loan means that the borrower owes more money on the car loan than the particular car is really worth. For example, you may still owe $20,000 of car payments for your car but its value may be only $15,000. This means that you are $5,000 upside down on your car loan.

The greatest pitfall of being upside down on a car loan is that even if you decide to buy a new car and trade in the old one, you would have to pay the negotiated price for the new car plus the amount you owe on the old car (in the example above, this amount is $5,000). In the same time if you decide to just sell the car, you will still be $5,000 short after you sell it.

Now you can see why nobody wants to get upside down on their auto loan.

How to Avoid Getting Upside Down on Car Loan Payments

New cars depreciate a lot. During the first 1-2 years cars may lose about 20-40% of their value. To curb this depreciation you may apply the following things:

  • Make a bigger down payment.
  • Don't extend too much your car loan terms, choose the shortest car loan term you can afford.
  • Buy a used car.
  • Avoid financing a vehicle for longer time than you think you want to own it.

How to Get Out of an Upside Down Car Loan

Advices on how to avoid being upside down on a car loan don't help much when you are already in a situation of negative equity. So how to get out of an upside down car loan?

Well, the simplest solutions would be to live within your means. Don't rush into buying a new car. If your car has already depreciated a lot, just keep using it and keep making your car payments. In some time the payments will catch up with the depreciation and you will be able to build equity in the car with every subsequent car payment.

If you however are determined to buy a new car, search for deals that come with cash rebates. Customer cash rebates can be a great way to erase the negative equity. For example, if you are $2,000 upside down on your car loan and find a car deal offering a $3,000 rebate, you can trade in your old car, erase your negative equity and still have extra $1,000 that you can use for fees and down payment.

The information and interactive car payment calculators that are provided on this site are made available as general assistant guidance in regards to car loans and payments. We do not guarantee that any information or calculations will be accurate or applicable to your personal financial situation, circumstances, or objectives. Accordingly, before making any final decisions we encourage you to consult a qualified professional and get personalized advice.

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