When you hear about being "upside-down" or "underwater" on a car loan, that's in reference to negative equity. Negative equity on an auto loan means that the buyer owes more than the vehicle is worth. Since vehicles often depreciate faster than they are paid for, vehicle buyers often go through a period of negative equity at the beginning of their loan term.
Some of the common situations that lead to negative equity include:
- Making a low down payment
- Falling behind on monthly payments
- Setting up a lengthy loan term
- Needing to trade in a vehicle before its loan has been paid in full
While negative equity is common, it's not a situation you want to be in for an extended period of time. If you're wondering how to get out of an upside down car loan, these strategies will help.
How to Get Out of an Upside Down Car Loan
Make Larger Payments
Increasing your payment amount will shorten the amount of time you spend with negative equity. But if you're unable to increase your payment amount, there are other options.
Refinance Your Auto Loan
If you have a high APR on your auto loan and you've been making regular, on-time payments, you might be eligible to refinance for a lower APR. This is something you do through the dealership or lender who facilitated your auto loan.
Refinancing can result in lower interest costs, which can lower the amount you owe each month without increasing your loan term.
Get a New Car Lease
Another strategy that's been gaining popularity in recent years is rolling your negative equity into a new car lease. In this scenario, the amount of money still owed on your current vehicle can be rolled into your monthly payments. While you will end up paying a higher amount in monthly payments, at the end of your lease term you will break even and have the opportunity to start fresh.
Then, the next time you enter into a new lease or finance agreement, you'll be able to start fresh.
Negative equity happens. It's not ideal, but it is something you can take control of. If or when you find yourself in this situation, follow one of the strategies above to pull yourself out and hopefully prevent it from happening again.