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Chris Sattlberger/Getty Images October 12, 2022 Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing clear, well-researched information that breaks down otherwise complex topics into manageable bites. Bankrate logo The Bankrate promise
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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our loans reporters and editors focus on the points consumers care about most — the different types of lending options, the best rates, the best lenders, how to pay off debt and more — so you can feel confident when investing your money. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. An upside-down car loan happens when you owe more than the vehicle is actually worth. To avoid being upside-down on your loan, or at least minimize the time that you are in this precarious financial state, you may have to make extra payments or adjust your insurance coverage. What is an upside-down car loan
A becomes upside-down when you owe more on the loan than the vehicle is worth. For example, your loan would be considered upside-down if your car’s value is $12,000 but your loan balance is $15,000. In this scenario, you have negative equity of $3,000. Being upside-down on a car loan isn’t always an issue. If you don’t plan on selling your car, you can continue to make payments on your loan until it’s paid off. It won’t change how you interact with your lender. But it can make some situations more difficult. If you want to , you’ll need to pay that negative equity. The same is true if your car is totaled. Additionally, having negative equity can make it harder to get a future auto loan with reasonable rates. You can technically roll any negative equity into a new loan, but this increases your chances of being upside-down again. How you end up with an upside-down loan
There are a few common ways people become upside-down on their auto loans: Financing a car with no money down. Vehicles can lose as much as in the first year of ownership. It won’t take long for your vehicle’s depreciation to overtake your equity if you don’t make a down payment or borrow too much money. Picking a long repayment term. Some lenders offer new car financing for up to 84 months (or seven years). This keeps monthly payments low, but your car will likely depreciate beyond your original purchase point by the end of that period. Buying a luxury model. Luxury cars tend to depreciate much more quickly than their counterparts. Combined with their high cost, you are more likely to have negative equity if you choose to buy instead of lease. Agreeing to a high interest rate. The higher your interest rate, the more interest you’ll pay the lender and the less that goes toward paying down the principal. And the longer it takes to pay down your principal, the higher your chances of being upside down. How to find out if your car loan is upside-down
Even though having an upside-down car loan isn’t always bad, it is useful to know where your loan stands. Determine if you have negative equity by following three quick steps: Request a payoff quote from your lender. A payoff quote is a document that shows exactly how much you currently owe on your vehicle, including interest charges. Calculate how much your car is worth. Kelley Blue Book’s gives you a low estimate of what your vehicle might be worth if you decide to trade it in. A private-party sale value, however, may net a higher price for the car. You can also request trade-in quotes from dealers in your area to gauge possible sale price. Do the math. Subtract the remaining loan balance from your car’s value to determine your equity. If the number is negative, you are upside-down on your car loan. How to get out of an upside-down loan
It’s easier to your vehicle if your loan is not upside down, but you have a few options if you already are. Make extra payments. An extra payment each month will help you build equity faster, especially if you tell your lender to put the payments toward the loan’s principal. Get gap insurance. covers what your insurance company pays for the vehicle and what you owe on the loan, which helps reduce your bill if your car is totaled. Refinance. into a shorter term or lower interest rate will ensure that more of your payments go toward your principal, which will help you catch up on your equity quicker. Pay it off. If you are planning to keep your vehicle, continue to make payments until the loan is paid off. Whatever remaining equity the car has at the end of your loan can be turned into cash via a sale or trade-in. 4 tips to avoid going upside down on a car loan in the future
If you’re not upside down but are planning on buying another car, there are some solid ways to lower your risk of going upside down. The biggest factor: pay as much as you can upfront. Make a down payment. A — ideally 20 percent of the total car cost — can prevent owing more than the car is worth. Take advantage of cash-back manufacturer rebates and trade-in value from your previous car. Pay the taxes and fees outright. Rolling taxes and fees into your loan automatically puts you upside-down, since you’re financing more than the car is worth. Instead, cover any additional costs with your down payment. Choose an appropriate loan term. If you can afford it, choose a equal to the amount of time you’re expecting to keep the car. This reduces the total cost and helps you avoid making payments as your vehicle loses value. Choose a vehicle with slow depreciation. Some cars hold their value better than others. Sources like Kelley Blue Book and Edmunds calculate to help your research. The bottom line
Being upside down simply means you owe more than your car is worth. There are ways to avoid it and ways to get out of it. And it’s pretty much inevitable, especially in the beginning of your loan term. However, there are ways to minimize the time you spend upside down. Making extra payments, increasing your down payment amount and refinancing are all viable ways to avoid staying upside-down and start building equity. When you’re shopping, use an to estimate how soon you’ll cross from negative to positive equity. Learn more
SHARE: Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing clear, well-researched information that breaks down otherwise complex topics into manageable bites. Related Articles