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What if You Owe More Than Your Car is Worth?

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If you owe more than your car is worth, there are ways to remedy the situation, also known as being "upside down" on your loan.

It's easy to find yourself in this situation due to some of the questionable car loan practices of recent years. In many situations, you may have bought your car with no money down and the day you drove it off the lot it dropped thousands of dollars in value. If you quickly realize that the monthly payments are too high for you to handle, or your income changes, you may find that your outstanding loan is higher than the Blue Book value of your car.

Lenders and car dealers also encourage buyers to buy that new car and just "roll your old loan into the new one". They offer to buy your old vehicle "even if you still owe money on it". This is almost never a good idea since you end up paying principal and interest for the new car which is depreciating in value plus your old car which you no longer own. In the meantime, the dealer has sold your old car for a profit and he also gets your additional monthly payments on it.

Now What?
It is possible to get yourself out of this situation, but it takes some time and determination and it will cost you some money. But if your goal is to get out from under the debt, you can do it. One option is to refinance your car loan so that the interest rate is lower. And you can voluntarily pay more principal every month so you get that loan amount down to a reasonable amount. But if you're already strapped for cash, paying more each month may not be an option, or if your credit or income won't allow for refinance, you'll have to consider other options.

Sell and Get Out From Under
You may want to sell the car and work towards eliminating the debt altogether. Here are some possible steps you can take:

  • How much is your car currently worth? Do the research and pick a price you can sell it for. Then ask for a bit more so you give yourself some negotiating room. But just because you need $10,000 to pay off the loan doesn't mean you can ask for or get that amount. Be realistic.
  • How much is the car loan you are paying off? The difference between what you owe and what you can sell the car for is the amount you'll have to pay to get out of your upside down financial spot. Find out in advance from your lender how you can transfer the title to the new owner if you sell the car. Since you'll be selling it for less than you owe, it's a more involved transaction than a typical car sale.
  • You'll have to come up with the difference between what is owed and what you will get on the sale and you'll have to pay it at the time of the sale in order to legally close that loan and get the title to the new owner. This money can come from a variety of options: your savings, a family member or friend, a bank or credit union that would be willing to give you an unsecured loan, etc. Since this is a much smaller loan than your car loan, the payments will be much lower and you should be able to pay the smaller loan quickly.
  • You'll probably need something to drive, and it is best to find something older and very low priced that you only need to drive until your small loan is paid off. It is possible to find reliable cheap used cars! When this loan is paid off, you will be debt free (as far as a car is concerned!) and should be able to find a more desirable car that you can afford.

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