What to do when You’re Upside Down on Your Car

“Upside down” is an auto sales term that describes owing more on a car than the car is worth. Many people who are in this predicament aren’t even aware that they are. How do you get to be upside down on your car?

• The value of your car dropped after you bought it by more than you expected
• You took something close to 100% financing when you bought your car, and depreciation took care of the rest
• You took a long term loan on your car, like greater than five years
• The value of your model was negatively impacted by a bad media report
• The friendly car dealer you bought your car from wasn’t really your friend after all

How ever it comes to be, being upside down on your car is not a happy state of affairs. It’s tough enough living with the knowledge that your car is worth less than what you owe on it, but in practical terms, it generally means you can’t sell the car to get out from under. But get out from under you must—how do you do that?

Never buy a new car when you’re upside down on the old one

This may sound obvious, but if you ask a car dealer what you should do, don’t be surprised if he or she tells you that you need to buy a new car. (But then ask a car dealer how to fix any problem in life and it’s a good bet you’ll get the same answer!) Dealers will often tout buying a new car because—technically speaking—it will get you out from under on the car you have now. Technically speaking.

What they won’t tell you is that this will be accomplished by “rolling” (more car sales jargon) the deficiency on the old car over to the loan on the new one so that you’ll be even deeper in the hole after buying a new car. Your new loan will include a) 100% of the purchase price on the new car (the old car has no trade in value), and b) the deficiency on your old car. And since the new car is new, you’ll take another fat depreciation hit the moment you drive the car off the dealer’s lot. Presto, you’re the dealer’s customer for life!

If you don’t know how to get out from being upside down on your car, and if you tend to be drawn to buying new cars anyway, you could easily be suckered into doing this. Don’t!!! The absolute worst thing you can do if you’re upside down on your car is to buy a new one.

Start prepaying your car loan

The only way to get out from being upside down on your car is by paying down your loan. Now since your loan has a fixed term, the most pain free way to do this is to ignore the fact that you owe more than the car is worth, keep making your scheduled payments and in due time the loan will completely disappear. That’s not a bad strategy unless you have a longer term loan, like six years or more.

The better strategy is to start adding small prepayments to speed up the process. By doing this, you can effectively turn a six year car loan into a five year loan, or even a four year loan. That will get you out of the hole even quicker.

Pay down the car loan out of savings

If you’re like me, and the idea of owing more on something than its worth bugs you, you can speed up the process by paying down the loan in a lump. You can do this by paying the loan down out of savings, or even by selling some possessions to do it.

Start by determining the true value of your car by checking out a reputable valuation site such as Edmunds.com. Once you know the real value of your car, you’ll be able to determine how much you need to pay down the loan to get it at or under the value of the car.

Why it’s so important to get out from being upside down on your car

Several reasons:

1. As mentioned at the beginning, you won’t be able to fix the situation by selling the car
2. If you do have to sell the car for any reason, you’ll not only have to pay out of pocket to cover the deficiency, but you’ll also have to come up with the down payment on the next car
3. You probably won’t be able to refinance the loan, and even if you could, you might have to come up with some cash to get the loan in line with the value of the car
4. Your auto insurance policy probably doesn’t cover the deficiency portion of your loan in the event the car is totaled (you’ll need “gap” coverage for that purpose, at extra cost)

If you are upside down on your car, take what ever steps are necessary to take control of the situation. The best course is to pay the car off as quickly as possible, and that way if you do have to buy a new car you can do it with the largest down payment. Next to buying cars for cash, buying with a large down payment is the best way to stay out of being upside down in the first place.

Have you ever been upside down on a car? What did you do to get out of it?