Various factors, including a high-interest rate, using a long term loan to finance your car, not putting up a down payment, or purchasing a car you can’t afford, can leave you with a remaining loan amount that is higher than the value of the car, which is referred to as being underwater on your loan.
Fortunately, if you find that this is your case, there are at least 4-ways to free yourself from this position and get back on top of your debt, including:
Refinance Your Car With Another Lender
Refinancing your car gives you the opportunity to swap out your current loan for a more favorable one, which can help lower the interest and thus the monthly payments on your car provided your credit is in good standing and your debt to income ratio is low.
However, some lenders have a maximum loan-to-value ratio to qualify for their refinancing, so be sure your car doesn’t have too much negative equity.
Trade in Your Car For a More Affordable One
You can also visit a dealer and trade-in your car for a cheaper one that’s closer to your remaining loan balance.
Just be sure your chosen dealer’s financing doesn’t involve taking your past loan onto your new loan because it can land you right back in the same position.
Make Additional Payments
You can also make extra payments to reduce your loan ahead of schedule and balance out the loan to value ratio.
And these extra payments don’t have to be a lot, as even just an extra $25 a month over time can significantly put a dent in your debt and help you build up equity and pay off your loan quicker.
However, some lenders have a prepayment penalty, so be sure yours isn’t one of them before paying off your loan early to avoid being hit with a fee.
Sell Your Car
You may also consider selling your car to another buyer to get out of your upside down car loan.
In some cases, you may even receive more money for your car than if you were to trade it in at a dealer, which can then be used to pay off your loan and put extra money in your pocket.
One way to find a private buyer is to list your car on a site such as Facebook Marketplace.
However, be sure to check your car’s value using a car value guide like the National Automobile Dealers Association Guide, which will enable you to sell your car for a good price so you can pay down the bulk of your debt.
In the end, according to Lantern by SoFi, “It can be a good idea to do your best to avoid getting underwater on your auto loan by paying as much as you can afford, building your credit to qualify for better rates, and considering less expensive cars.”
Otherwise, you risk the car being totaled in an accident and then still owing on the loan while also having to take out another loan for a new car, which can significantly strain your budget.