Upside Down Car Loans: Eight Simple Steps To Get Out Fast

Let’s face it; most Americans love cars. Unfortunately, most Americans also have way too much car debt.

In an article from Auto Blog posted just a few months ago, they cited increases in new car pricing, and the effect those prices are having on family finances.

A study by Comerica Bank shows that the average purchase price of a new vehicle went up $300 in the second quarter versus the Q1, bringing the average transaction price to $26,300. The upward swing in prices came at a time when the average household income remained stagnant. The average family needs 22.1 weeks of median family income to pay for their new vehicle purchase…

upside down car

It’s true; cars typically represent one of the largest expenses in a household budget. Only housing costs the average family more each month. Factor in gas, maintenance, taxes, repairs and car insurance, and the cost of owning a car pushes even higher.

The most significant expense most people neglect to factor is depreciation.  New cars go down in value like a rock. Some new cars can lose as much as 20% of their original value when you drive it off the car lot. This quick depreciation, and the accelerated depreciation that often follows, leaves people owing much more in car loans than their car is worth.

If you find yourself in an upside down car loan, it is a safe bet your situation could be improved if you sell that “new” car and buy a much cheaper used one for your work commute. You may still owe money, but you’ll owe much less money, and that is almost always a good thing.

How to Get Out of An Upside Down Car Loan

1. The very first step to getting rid of an upside down car is to evaluate how much your current car is worth. Using sites like Kelley Blue Book and Edmunds, try to determine the amount of your current car’s private sale value (not trade-in, which is often much lower). Be sure to be honest about the condition of your car, and enter the exact mileage to get a good valuation.

2. Save $2,000 to buy a “beater” to get back and forth to work. If you really want to get out of your upside down car loan, now is the time to swallow your pride, and put aside your love of shiny cars. Over the next couple months, try to scrape up a couple thousand dollars to buy an old, ugly (but mechanically reliable) car to get you to work. That’s the only requirements. No sex appeal; no bells and whistles (and no car payment!).

3. Get an updated loan balance on upside down car. Contact your bank or auto finance company and get the current “pay off” balance on your car. Compare this figure to the estimated sale price from step one. Often times car owners discover that they are not really upside down after all. However, if you bought new with nothing down, and/or rolled the balance of your previous car loan into your new one, chances are you are in fact in an upside down car.

4. Contact local bank or credit union to pre-qualify loan for the difference. Let’s assume you owe $22,000 on a car estimated to be worth $17,000. Unless you have $5,000 sitting around, you are going to need help paying off the car loan when you sell the car (this is a required step to clear the title for the new owner).  Discuss options for a personal loan in the upside down amount. This step is a lot easier if your loan is already financed at a local bank or credit union. Simply explain to the loan officer that they are already exposed to $5,000 in unsecured liability based on the figures you’ve obtained.

5. Consider alternate sources of funding. If your bank or credit union won’t budge, or your car is financed through the manufacturer, you will have to look for other ways to fund the difference. If you have good credit, Lending Club is a potential source of financing. Tell your story as part of the borrower profile and ask for help in dumping your upside down car loan.

6. Get your car detailed, inside and out. Back when I was in the market for a car I was amazed to find so many dirty cars for sale. It doesn’t take a lot of money or time to give a car a thorough cleaning, and clean cars bring more cash, so there is definitely a return on your investment.

7. Advertise your car is for sale in every legal place you can think of – and include pictures. Pick up a “For Sale” sign at an office supply store and stick it in the windshield with your cell phone number. Place a flyer with color pics (take a couple good photos, design your own flyer in Microsoft Word or Photoshop, and get a few color copies made) on your gym’s bulletin board, at work (where allowable), and post on Craigslist, community classified sites, etc. Tell your Twitter followers, friends on Facebook, email distribution…everyone you know that you are trying to sell your car.

8. Create a bill of sale to provide buyer, and immediately drop your insurance coverage on old car. Since it might take a while to deposit the money from the buyer, and close out the financing on your loan for the difference owed to pay off your car, prepare a bill of sale for the new owner to show proof of transfer of ownership. Bill of Sale forms for your state can be found online at places like LegalZoom.com. Be sure to also get new owner’s mailing address (if different than listed on the bill of sale) so you can forward the title to them when the finance company returns it to you after loan is paid in full. Also, be sure to contact your car insurance company immediately following the sale to update your policy.

With your upside down car gone, and the huge car payment replaced by a smaller loan payment, start a car replacement fund to prepare to buy your next car with cash. Over time, you will eventually be able to trade up in car, but only do so when you are able to pay cash for a car. Who knows; you might even find yourself driving a million mile car one day and skipping car payments forever.

Photo by ozjimbob

Comments

  1. I agree. Even if you can’t afford to get your car detailed and don’t have time to do it yourself, just running it through a car wash and getting rid of any trash that may be in it will help. Subconsciously people see a neat and clean car and believe that means the entire car is well-maintained.

    One other tip is to include the price when you’re plastering the for sale signs everywhere. You’ll eliminate a potential roadblock to getting it sold that way.

  2. This may be a REALLY stupid question, but assuming you haven’t overspent on a car in the first place, and assuming you can drive the car into the ground, is there a reason it is horrible to be upside down in a car loan?

    • Its not really If the car remains like new for the full term of the loan. but when you can barley keep up those high payments, are forced to drive high miles for work. perfect maintenance can get you back to the upside right.

  3. @Kristen: No, being upside down is not necessarily bad, since it doesn’t affect your payment or how the car operates. However, if you are deep in debt, including an upside down car, it might make sense to dump the car to free up the large car payment for paying down other debts.

  4. A friend of mine worked in a busy car dealership selling cars for a number of years, and he said that the upside down situation isn’t at all uncommon.

    The worst part, he said, is that many people in that situation either don’t know it, or don’t care! All they want is the car!

    The basic pitch is to sell the car and the monthly payment. Car buyers are often only too glad to be upside down, if it eliminates the need for a down payment.

    It’s the old saying, you can pay now, or you can pay later. It’s amazing how many will take the second route.

  5. Back when I was looking for a newer, but used car. I had too many bad experiences with dealers. Actually I am still having bad experiences with dealers. Too many want to sell you too little car for too much money. The other day I had one try to sell me one that completely died in the middle of test driving it. At least make the car run LOL.

  6. I feel like I am totally upside down in my car and it isn’t just from what I own on the loan. Unfortunately, I have had to sink almost $5k in repairs into my car. So even if I sell it in a private sale for what it is worth – I will still be out the money it has taken me to fix it. I loved the car when I bought it and felt I was getting a good deal. A year and a half later, I have basically had to rebuild the engine. Yes, I bought it used.

    What are your thoughts on leasing instead of buying?

    • I know a little about leasing. If you clean up your credit and get into a car without rolling over debt from another car you will be fine. Find a good car with low payments is the key. Don’t get crazy and by a more expensive car than you need. Car suggestions would be nissans, toyota or honda. Most dealers will ask for 2k or more to lower your payments. Read the fine print and don’t by any extended warranty’s since you will only have the car for 3 years. It would be a waist of money. My dad is an honest guy and he tells it like it is. Hes got 30 years exp in the car business. I learned a lot from him. I am going to get my lease thru him on my next car. I never believed him and its true. Car repairs will kill you. Its better to have a car that is new and has a warranty. Last month I had over 1000 dollars on 2 cars to fix and its killing me now. Once your out of that cash it will hurt when you really need it.

  7. I’m with Linette – it’s easy to opine that a person should buy a mechanically sound used car; it’s way harder to find one. If your monthly payment is $400, and you pay 2K for a used car, it has to go 5 months without problems for you to break even financially. And a car that you buy new and maintain properly should keep going for years after you have paid off the loan (even a 60 month loan); you have very little assurance of such with a used car.

  8. You may actually be able to find a nice “beater”. I’ve started seeing 2000-2002 model cars in great condition with less than 120k miles for under $7k. Not quite the $2k beater. Cars like Toyota, Audi, Volvo, etc. Craigslist: use a search tool that will search multiple craigslist locations vs. just your city.

  9. Becoming upside down on a car loan is one of the most common financial mistakes. Money Crashers gets hundreds of hits a day from the posts we’ve written about being upside down. The best way to prevent this from happening is to pay cash for a used car or save up a huge down payment. Don’t do SIGN AND DRIVE!

  10. i had an explorer at 12 mpg, ugh, with ten k on it so i got a fusion at about 30mpg or so and ended up owing 16k, the car books at 8200. i will drive this thing until one of us dies, the payment is only 275 and it is the better motor and tranny.
    if this thing quits i will haul it to the river and have an ACCIDENT!

  11. Great post, for me, I would rather buy a used car if consider the new car’s depreciation but if I have no other choice, upside down car loan would be better.

  12. Question: I have had a car loan for over 5 years, and I am totally upside-down in this loan, I have a $502 a month payments, I bought the car from a dealer for $21,000 used and put $2,000 down. I have made all the payments up until 3 months ago, when my income disappeared unexpectedly. I still have a payoff of $7,000 and the blue book on the car is $4,500. I am 2 months behind on my payments and the auto finance company is threatening “repossession”. My credit is already bad from this loan, so would it not be better to simply voluntarily return the car to the dealer instead of not making the payments and getting the car repo-ed? My parents have an extra car (that is fully paid for) they will let me use until I get back on my feet financially and increase my income again when I can buy a cheap used car. So, if I do this “turn in the car deal”, what is my exposure financially and will it solve my “not enough income” problem or will it cause some other unforeseen problems for me? Your answer would be greatly appreciated.

    • No brainer, go bankrupt and in a couple years you will be in better shape than you would be if you kept it with late payments!

  13. your credit is affected because you haven’t made your payments on time but a car repo, voluntary or involuntary (same thing!) is horrible on your credit.

  14. I spent $1600 fixing my 2007 pt cruiser last year. The car still has $6700 left of payments and I want to trade it in to a dealership and get whatever I can for it. What should I really do? Car is a money pit

  15. Putting a huge down payment is NOT the best choice. For every $1000 you put down, that’s only $10 off your monthly payment. Once you pay that car off, you’re not getting that money back. Save the “huge down payment” for any unexpected expenses and go with a smaller down payment.

  16. Omg, here’s a good story. I traded my 2010 Honda CRV toward a 2004 Jeep grand Cherokee, the payments were going to be to high after my income drops. So I wanted to try and get another car that I could buy, I have done leases for years I wanted to buy a car this time. So because I’m poor I had no down payment $, I had to pay extra charges. Ever since getting this car it’s been nothing but $$$ and strange problems, the heater/ AC go off and on random, the door locks click lock and unlock random. And the steering has gone to crap, I took it back to this Mercedes Benz dealership that sold it to me, and they didn’t hear or see any of these problems. Their mechanics were idiots, only when it comes to working on anything other then a Mercedes. So they admit they know nothing about Jeeps, they send it to a German shop. They found my battery cable bouncing on the top of the battery, that was just 1 thing they saw. I had this car checked out by 1 mech because I live too far from the dealership to make trips back and forth, even though I did do it like 5 times trying to get it fixed right. I could write a book on how much crap this car has put me through and cost me. Right now I have not had it a year yet, I have put major $$ trying to find and fix all the problems they can find. Every morning when I have to drive it, I wonder what is it going to be like today ? I can hardly steer it still, had power steering pump replaced , I was told to. And it’s like a tug of war trying to steer it sometimes, operative word ” sometimes” everything is random. Oh and the windshield got cracked within a month after buying it, from a gravel truck flying by me. I’m just done, so done with this car. It’s not that I got into a bad car loan etc. the car turned out to be a lemon, but used cars don’t apply to the lemon law. Sure now there’s a law about it, too late for me. I’m disabled trying to live on SSI income, barely $900.00 a month. Balance on my loan is $13,766.00 and the trade in value of the Jeep is barely $5000.00. So now what ? There’s a bad noise coming from my ball joints on my front left, and the shocks are the originals. About $1500.00 to get all that done, sure pocket change ! I’m trying to get a dealership to help me, my credit rating is in the 700′s I thought that would help ? I was hoping they would take the Jeep as part of the down payment , and roll over the balance to a new loan for another car ? I don’t know if they can or will do that, I have to try before I throw away anymore of my precious $$. I feel royaly screwed.

  17. So I’m getting out of the army soon. I financed this car as soon as I joined basically, I never missed a payment but seeing as I might not have a job after the army right away idk if I can continue to pay $359 a month. I owe like 13,000$ and the car is only worth 11,000$. I already have a backup at back home, so I really just need to drop this car. How bad will this crush my credit? What kind of personal loan would the bank try and give me? Will they even attempt a 2,000$ personal loan?

  18. hmm I see so many situations such as this and realise how glad I am to have bought the trucks I buy, I got 2 big diesels, cummins and a powerstroke, got them used. A used diesel has got to be the best vehicle to purchase with a loan, they depreciate at a quarter or less of the rate of normal vehicles (my 2001 f250 still blue books for close to 14,000$, my 93 cummins still blue books at around 4500-5000$) and they are built stronger (ford at 440k and cummins at 292k, both run like brand new of the showroom floor trucks) plus I average close to 20 mpg unloaded, and get the benefits of alot of cargo room plus potential to make money hauling as they both have 5th wheels and reciever hitches. I only have maybe 100$ or so in repairs each year sometimes less since everything is so strong and stout, oil changes are expensive, roughly 100 or so dollars but unlike a gas vehicles 3-5000 mile a change my diesels can go 8000+ miles and twice the time period, and the oil is always still clean even when I do the oilchange. I’ve never had to experience the upside down car payment issues, I’ve always got my diesels sold around half thier value used from private party and due to the factors above I still havent spent more than the vehicle’s resell value on them yet (after owning the ford as long as I have, probably getting close to the resale value in total expenses including fuel costs since I’ve owned it). Also on a side note, my ford is worth a couple thousand more than an average f250 of the same year, was a special limited production edition. Not saying all of this to brag, more just stating that “what everyone says” isnt true, most people say diesels are far more expensive than newer little hondas and stuff, yet my parents will go upside down in thier 2012 civic before I ever get close in my 2 big diesels plus thier engine life expectancy even under high maintenence probably maxes out around 400k, both of mine can hit 1 million plus miles (look it up, the good diesel engines can hit over 1 mil miles, I’ve seen a cummins hit 1.5 million) but according to society I’m the one who bought 2 overpriced expensive vehicles lol. hopefully some of you will consider a good solid diesel truck, you’ll be happier but they can be difficult to drive at first for those of you used to a little car.

  19. I still owe on my car in which I think was a lemon from the dealership because the car was purchased from Florida. I think it is one of those cars that we in the flood they had a couple of years ago, dealership bought a bunch of those cars, fixed them up and sold them. My credit report says I still owe them $14k and the car is valued under $11K. I got a new job which pays more and I want to lease a new vehicle. What do you suggest I do with the one that I owe? Use as a trade in and pay the difference owed to go on the sign in amount for the lease?

  20. Here’s my situation: Purchased a 2013 new toyota tundra 6 months ago at a ridiculous $913/mo. Although i can afford the payment, I am unable to purchase a home because of my Debt to Income ratio. I’m upside down on this loan because i rolled in $5000 from a trade in I had before. I’d like to bring my payments down to about $450/mo. So, my question is; If i go back to the dealership and tell them i would like to trade in the truck for a much more cheaper vehicle, would that help my situation or make it worst? Will buying a vehicle that is cheaper than what i trade in, be a good idea?
    Thanks, Mike.

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