The Upside Down and Underwater on Car Loans

The Upside Down and Underwater on Car Loans

how to rise above water

There is no silver bullet that will magically get rid of negative equity. Your options are to deal with the situation now or later. This way:

Stay Connected to Your Existing Car: You probably don’t want to hear this, but the best strategy for getting above water is to cancel plans for a new car and stick with what you have. You have to keep at it at least until you reach the break-even point in the loan. Ideally, you want the car to be worth more than the amount you owe.

If you brought a balance over from a previous car, you may never break even, at which point your only recourse is to pay off the loan in a lump sum.

To get up out of the water faster, try paying bigger, if your budget will allow it. You may also consider refinancing the loan. This will result in a lower interest rate and lower monthly payments.

Roll over balance into a new car loan: This is the most common method that people use as it does not cost anything from their pocket. The dealership will roll the amount you owe on the trade-in vehicle into the new car loan. This provides a convenient way to buy a new car, but your monthly payments will be higher. You will not only be paying interest on the new loan, but also on the outstanding amount you owed on the previous car.

Incentives can reduce that balance, or potentially even wipe out negative equity. For example, if a person had $1,500 upside down on a trade-in car and wanted to buy a new car that had a $2,500 discount, he could wipe out the negative equity and still have $1,000 for the down payment on the new car. .

Note, however, that cars with heavy incentives tend to have lower resale value for at least three years, according to Edmunds pricing analysts. This means you will be inverted for a long time. In other words, it will take longer for this car to be available as a free-and-clear trade-in.

Roll the loan into a new car lease: An alternative strategy is to lease a car instead of buying it. The approach is largely the same: You trade in your car that has an outstanding loan. The remaining amount is included in the lease. You’ll still pay more than the normal monthly payment, but at the end of the lease (usually three years), you’re no longer upside down. If you qualify for lease specials with low monthly payments, such as the deals for $299 or less that have become increasingly common, it can soften the blow of carrying negative equity along. You won’t have to worry about any resale value issues as the car goes back to the dealership at the end of the lease.

But there is a rub. You don’t have a car to use as a trade-in for your next purchase. Your options are to re-lease or finance your next new or used car purchase.

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