First off, we’re not talking literally as if you had driven your car into a lake. When your car is underwater, it means you owe more money than it’s worth. Let’s say you took out a loan to buy a car, around $10,000. Now after some time has passed your car is worth $7,000 but for whatever reason, be it interest or missing payments, you still owe $8,500. This is what it means to be under water, or to have an upside down car loan.
Like we said, this may happen either because of high interest rates on your loan or failing to make payments. Sometimes it’s also caused by new car depreciation, which depending on the car, can be upwards of 37% over five years. Don’t forget that a brand new car automatically loses around 20% the moment it’s driven off the lot. That means if you bought a sports car but for whatever reason needed to trade it in immediately, you would most likely be underwater with your loan.
If you are underwater on your car loan, don’t panic just yet. There are a few ways to get out of it. Nothing’s going to be an instant fix, but with some elbow grease you’ll be able to tread water until you get to shore.
One option is to keep the car, and if you’re going to do this you should try to make larger payments to make up for the difference.
You can also try to get your car refinanced, as that can make the interest rate go down and make your payments more affordable.
If you’re dead set on getting a new car despite being underwater with your current one, an option you may take is to trade in the car you owe money on for a new car, and your debt will be rolled over into the new car loan. In other words, you’ll be paying off what you owe as part of the new car’s monthly payments. If you decide to take this route it would be a good idea if your new car is on the cheaper side. You should also expect to pay the interest on the new car loan as well as on the balance of your previous car. This method can also be used on a new car lease. You’ll be above water by the time it’s paid off.
There's another option and that is to sell it privately. This requires more leg work on your part as the seller, and is more difficult. However if you play your cards right you could get you more money selling it privately than if you traded it in to a dealer.
The first step would be to figure out how much you owe on the car, then find out its market value. No matter what, you'll still have to pay off what you owe, so a solution to this is once you get someone interested in buying your car, get cash from them and use that to pay off what you owe. After that you can transfer the title to the new owner.
A way that might work even better is if the buyer also has a loan, because then the title can transfer from your lien holder to theirs.
Finally, we come to the loan payoff. This is where you take some money you’ve set aside as a down payment on a new car, use it to pay off the old loan and then get the new car without a down payment. Depending on your credit score, this is possible and could even save a bit of money, but it all depends on what’s your credit is and what you will be approved for.
If you’re in a situation where you’re underwater, the most important thing to do is to get above water. The first method of keeping the car for a while is usually the best way to go about this, mainly because the longer you keep it the better chance you have of getting out of debt and at the very least break even. It is the most sensible way to manage an underwater situation. Make sure you keep up with payments as well, because if you don’t, missed payments will have a detrimental effect on your credit history down the line.
Not your typical used car salesman. Our team is here to provide honest and transparent advice about car buying and selling.