What Does it Mean to be Upside Down on a Car Loan?
Learn about the options when you owe more than what your car is worth.
Capital One
Originally published on October 24, 2017
Article QuickTakes:
Underwater. Upside down. Negative equity. No matter what you call it, it all means the same thing: you owe more on your car than it’s actually worth. That’s not a fun place to be, but it’s not uncommon, either. Many trade-ins often involve an owner that owes more money than their outgoing car is worth.
HOW DO YOU GET UPSIDE DOWN ON A CAR LOAN IN THE FIRST PLACE?
Usually, it stems from a combination of depreciation and the lack of a down payment. Due to depreciation, new cars lose 20-25% of their value during their first year. If you need to sell your car or if it’s totaled in that first year, you still need to pay off your loan. That’s when being upside down can really come back to bite you.
A sizable down payment—in the neighborhood of 10-20%—will help offset some of that depreciation. Also, as you make steady payments over time, you’ll likely accrue equity. This combination—accruing equity, combined with a sizable down payment—further offsets the loss from depreciation and helps minimize your exposure if you have to sell your car or otherwise pay off your loan on short notice.
HOW TO GET OUT OF A NEGATIVE EQUITY SITUATION
When you’re trying to get out from underneath your loan, there are some common strategies that could help you depending on your situation.
- Stay with the car you have because time is your friend here. It may not be the most exciting option when you’re ready for an upgrade, but staying with your current car and making consistent on-time payments is a tried and true way to get out from under your loan.
- Make extra payments. If possible, making extra payments to decrease the outstanding principal balance can help you get above water sooner.
- Refinance your current car loan to receive a lower APR. A lower APR will allow you to pay down the principal balance sooner if steady payments are made. Paying down the outstanding principal is key to getting above water.
When it comes to being upsie down on a car loan, it’s good to know your options—and to know that there are ways out. You just need to do your research and see what makes the most sense for your situation.
