6 Ways to Get Out of an Upside Down Car Loan

Car loans can help you afford a vehicle that you need for work or pleasure. However, having the best car loan is important. If not, it can quickly become a burden, especially when your loan balance is higher than the value of your car. This is known as being upside down in your car loan and it can be a stressful situation. You may feel stuck with high monthly payments and a car that is worth less than what you owe. Fortunately, there are ways to get out of an upside down car loan. Here are six ways to get back on the right track.

Create a plan

You'll need to calculate exactly how much negative equity you have. Determine your car's current value. You can go to websites such as Kelley Blue Book or Edmund's to get a good idea. From there, you can subtract any outstanding balance on your loan to determine your negative equity. Contact your lender or log in to your online account to find out how much you owe.

For example, if your car is worth $20,000 but your car loan balance is $24,000, then you are upside down by $4,000. Once you have a clear understanding of the situation, you can create a plan to start chipping away at that debt. Choosing the right solution ultimately comes down to two key factors: keeping your car or your money, and how quickly you need to get your personal finances in order.

1. Pay the difference

If you have the money, the best thing to do is pay the difference. You can sell the car, and then pay the difference between that and the amount you owe. Make sure you don't deplete your emergency savings account in the process, though.

2. Make extra payments

If you don't have the money to pay it all off, then making extra payments can help you pay down the loan balance quicker. Consider making bi-weekly payments, rounding up your monthly payment, or paying extra when you can to help make a dent in the loan balance.

You can also increase the payments you make. The bigger your payment, the more quickly you will pay off your loan. With each extra or larger payment, you whittle down the amount you owe and reduce the interest that continues to accrue. However, check your budget and make sure that you can afford to make the extra payments. If not, you may end up in a worse situation.

3. Refinance your car loan

Another way to get out of an upside down car loan is to refinance your loan. By refinancing the loan, you can lower the interest rate and your monthly payments. Additionally, if your credit score has improved, you can get a better interest rate and terms than you did initially.

Refinancing does come with fees and charges that you'll need to consider. Be sure to shop around for the best refinancing terms and to avoid extending the loan term too much, as this could lead to paying more interest in the long run.

4. Trade in your car

If your car is still in good condition, you can trade it in for one with a lower payment. This way, you can reduce your debt while also getting a car that you can afford. This solution is generally not ideal, however. Trading in your car may not get you out of an upside down car loan entirely.

This is because the amount you owe is added to the cost of your new car, which means you still have to pay the same amount of money. You can try to find a car that is $4,000 less than its value, but with today's record-setting prices, it may be difficult to find one.

5. Sell your car

One of the easiest ways to get out of an upside down car loan is to sell the car and use the proceeds to pay off the loan. If you owe more than the car is worth, the sale price may not cover the entire loan balance.

In this case, you will need to come up with the difference to pay off the loan in full. While this may seem like a daunting task, it can be worth it in the long run to avoid being stuck in a high-interest car loan.

6. Keep the car and wait

If none of the above options work for you, you can always keep the car and wait. You can continue to make your payments and pay the car off. This option is not the most desirable but can be the most beneficial in the long run, especially if it is a car that you wanted to keep.

Being upside down on a car loan can be a stressful situation, but it's essential to know that there are effective ways to get out of it. The average person buys a car every 10 years. Upside down car loans usually occur because either the down payment was too small, the interest rate too high, or you overpaid for the car. Do your research before you purchase a car so you don't get caught in this situation again. In the meantime, these solutions can help you get out of an upside down car loan. Remember, every journey begins with a single step, and taking action today can help you get closer to your financial goals.