How to Get Out of an Upside Down Car Loan

Key takeaways: 

• An upside–down car loan means you owe more on your car loan than the car is worth.  
• To help you select the right course of action, you need to calculate your negative equity. Negative equity is how much you owe minus your car’s value.
• One of the best ways to resolve an upside–down car loan is by paying down the loan principal amount faster with extra payments.

There’s something inherently exciting about getting a new car. Although, according to CARFAX, cars usually lose more than 10% of their value after the first month of ownership. With time, the value of your car continues to decline. 

Because of this loss in value, car owners may be upside-down on their car loans without realizing it. Being upside-down on a car loan means the amount owed on a car loan is greater than the value of the car.

Pro tip: An upside–down car loan is also called being underwater or having negative equity. This can apply to any vehicle you may have a loan for including trucks, tractors, or haulers.

Dealing with an upside–down car loan can be a hard financial situation to navigate. But, there are ways you can take control and steer yourself right-side up. 

What is an upside-down car loan?

You’re upside–down on your car loan when you owe more money on the car than the car is worth. Because cars lose value so fast, getting upside–down on a car loan is pretty common. For example, if your auto loan is for $15,000 and your car is worth $10,000, that leaves a $5,000 difference in negative equity, making the loan upside down.

How do you get upside-down on a car loan?

In the excitement of getting a new car, many new owners overlook the terms they agree to when they finance a car. This can leave an owner with an upside-down car loan. Here are some of the most common reasons car owners find themselves in an upside loan:

Not enough research

You may end up paying more for your car than it’s worth if you don’t do enough research ahead of time. Before you commit to a car, compare car models and different sellers to find the best deal possible. 

Unnecessary additions

You may be convinced to opt for fancy add-ons like a sunroof, leather upholstery, or heated seats. Although these options may seem appealing, they can cost you more and may create more debt with little overall added value. Taking on more debt increases your chances of going underwater.

Little or no money down

Costs outside of the price of the car, such as taxes, licensing, registration, and dealership fees, will add to the amount of financing required. Not putting any money down for a car may sound like a good deal, but doing so can cost you more over time. 

Similarly, if you put a small down payment on a car, you’ll need to extend the financing later. In the simplest terms, no money down or a small down payment means you’re more likely to wind up negative equity in the long run. 

Long-term loans

Car loans with a long term, such as 72 or 84 months, can make payments more manageable, but they may leave you with an upside-down car loan. With a longer loan term, your car may lose its value faster than you can pay down the loan. 

Additionally, the longer the loan term, the more it’ll cost you in interest. To avoid negative equity, opt for a shorter loan term if you can afford it.

Loans with a high-interest rate

Before you commit to an auto loan, research different lenders and options to find the best deal possible. If you don’t, you may need to rush to get approved for and accept a loan with a high-interest rate. 

Too expensive

When you get a new car, it’s important to stick to your budget. Going over budget with a fancy car will compete with other everyday essential costs you need to account for like rent and groceries.

How to get out of an upside-down car loan?

Unless you’ve totaled your car or you need to sell it immediately, you can navigate your way out of being upside down on a car loan in a few ways.

Calculate your negative equity

The first thing you need to do is to determine the negative equity on your car. You can do this by doing some basic math.

1. Check your balance: Learn what you owe on your car by checking your most recent loan statement or by contacting your lender directly. 
2. Research how much your car is worth: Find out what your car is worth. You can do so by checking Kelley Blue Book, Edmunds, or the National Automobile Dealers Association. Each of these resources has guides and online calculators that can determine a car’s value based on its model, year, condition, mileage, and more. Review more than one source to make sure your estimate is accurate since resources can vary. 
3. Do the math: Once you know what you owe and how much the car is worth, subtract the car’s value from what you currently owe. 

Get out of an upside-down car loan

Once you’ve calculated the negative equity, consider your options to help you get out of an upside-down car loan. 

Continue making car payments

No matter how much negative equity you have, it’s essential to continue making on-time payments. Making consistent payments will help pay down the loan, lower your balance, and increase your equity. It’ll also help protect your credit score. If you’re unable to make payments, talk to your lender to adjust your repayment plan or come up with another solution.

Additionally, you can talk to a credit counselor at a nonprofit agency. Counselors who are certified by the National Foundation for Credit Counseling will talk to you at no cost. They’ll partner with you to review your finances, help you budget, and make a plan to lower your debt.

Make as many payments as you can afford

The sooner you can pay off your car loan, the quicker you can resolve your upside-down car loan. A good way to do this is by making extra car loan payments. If you can afford it, consider making extra payments toward the principal of your loan each month. Before you start, check your loan agreement to see if there’s a prepayment penalty for paying off your car loan early.

Consider getting rid of your car

If you’ve considered all of your other options and you’re unable to improve your car’s depreciation, you may want to sell your car. 

For the best results, do everything you can to get the highest price possible so you can put more toward your remaining loan balance. Some options to improve resale value include detailing the car or fixing any mechanical issues. If you have a low budget, clean the car yourself.  

When you’re ready to sell, opt for a private sale rather than trading it in or selling it to a dealer. If your car is in good condition, you’ll likely make more money through a private sale. 

After the sale is complete, consider using public transportation (if available) instead of getting a new vehicle. By using public transportation you can save money, which can help you pay off the remaining balance on your loan.

Can you refinance an upside-down car loan?

You may also resolve an upside-down car loan by refinancing your car loan. When you refinance, you’re essentially getting a brand new loan to pay off your existing one. 

The goal of refinancing is to get a lower interest rate and/or monthly payment. This may be an excellent option for you, especially if you have good credit. 

Learn more about refinancing your car loan to determine if this path is right for you. 

Pro tip: Check your credit score before you decide to go this route. If your credit score needs improvement, you may need to spend a few months paying your bills on time or paying down other debt before you apply. Otherwise, you may not qualify for a better interest rate. 

Next steps from an upside-down car loan

Turning your upside-down car loan right-side up isn’t easy, but it is possible. Whether your goal is to pay the original loan off quickly or refinance your car loan entirely, you have options. And with a bit of research, you can make the best financial decision for you.

Car refinance loans not available in IA, MD, NV, or WV.