How To Get Out Of An Upside Down Car Loan

Upside down, underwater or negative equity means the same thing. It is a situation where you owe more on your car loan than its market value. Although being upside down is not ideal, it is common for most people to have negative equity early in their lease term. New cars have high depreciation in the first few months, which usually results in negative equity. Most leaseholders do not know they are upside down on their loan until they consider trading in their vehicle. We recommend that you check the status of your car loan as soon as possible. If you have negative equity, you should learn how to get out of an upside-down car loan quickly and take measures to protect yourself against any eventualities.

On most occasions, an upside loan is nothing to worry about as long as you make monthly payments on time. That said, being upside down on a loan can be problematic if you fail to make monthly payments or get into an accident that totals your car. Taking GAP insurance is beneficial if you have negative equity as it covers the balance in your loan. We look at how to get out of an upside-down car loan quickly and steps you can take to avoid negative equity.

Reasons You Should Avoid An Upside Down Car Loan

You will not likely know that you are underwater on your loan as long as you do not have incomplete or missed payments. An upside-down situation is problematic if you want to trade your car, get into an accident, and insurance declares it a total loss, or if it is stolen. Some of the things you should know under different situations include:

  • Selling a car with an upside-down loan: After some time, you may want to get a new car. It is easier to sell your car with positive equity as you only need to pay the trade-in value. The positive equity will act as a down payment on your new vehicle. With negative equity, the trade-in process becomes complicated as it means you owe more than the vehicle’s value. The dealership can rollover the balance into your new loan, which means higher monthly payments. Balance rollover will increase your chances of being underwater with your new vehicle’s loan.
  • Your car is stolen or totaled: In case your vehicle is stolen or declared a total loss after an accident, the insurance cover will not settle the loan fully if you are underwater. The comprehensive or collision policy will only settle the value of your car, which means that you will have to find money to settle the balance. Remember the remaining balance becomes due immediately after the accident, which can add stress if you do not have adequate savings. GAP insurance offers peace of mind by ensuring that you have full protection. It covers the balance in value.
  • You can no longer make your monthly payments: The dealership expects you to make prompt payments during the loan period. If you can no longer make monthly payments, you can sell your car and settle the loan. However, that is possible if you have positive equity. The amount you will get from your vehicle will not be adequate to settle the loan balance if you are upside down. You will have to get another loan or use your savings to clear the balance.

How To Tell If You Are Upside Down On Your Car Loan

Before we look at how to get out of an upside-down car loan, you should be able to calculate your equity. You can calculate the equity by subtracting the loan balance from your vehicle’s buyout value. A positive figure means you have positive equity, while a negative amount means you are upside down on your loan. For example: If you have a loan balance of $20,000 and your vehicle’s buyout is $22,000, you should subtract $20,000 from $22,000 to get $2,000, which is your positive equity.

On the other hand, if the loan balance is $25,000 and the vehicle’s value is $22,000, you should subtract $25,000 from $22,000 to get negative $3,000, which is your upside-down amount. Your underwater amount will depend on the value you can get for your car. If you get a private buyer willing to pay $24,000 for your vehicle, you will reduce the negative equity to $1,000.

Ways That You Can Get Upside Down On Your Loan

High depreciation

Although all new cars depreciate quickly when they leave the dealership, some makes and models have a higher depreciation rate. A vehicle that holds it’s value well will depreciate over the first year and level off as the vehicle ages. A large percentage of your early monthly payments go towards depreciation and interest, which makes it likely to have negative equity early in your lease. The problem is dire if the car has a high depreciation rate. You can avoid being underwater by putting a large down payment or paying a little extra on your monthly payments.

No down payment

Buying a lease car with no down payment is attractive as you do not need substantial savings. Unfortunately, the lack of a down payment means that you will not be able to keep up with the depreciation of your vehicle. Giving a large down payment does not make financial sense, but it helps you avoid being upside down on your loan. We recommend that you give the most reasonable down payment for your lease, which is about 20 percent of the car’s value.

Longer lease period

While extending stretching your lease loan over a longer period will enable you to make smaller monthly payments, it will make it impossible to keep up with your car depreciation. You will also pay more interest over the life of your loan. Our advice is that you should opt for the shortest loan period you can afford, keeping in mind the depreciation effect. A 4-year lease usually offers the best value. It is wiser to look for an affordable lease that you can pay off within a few years than an expensive car that requires an extended car loan.

High-interest rate

People with low credit scores tend to qualify for lease deals with high-interest rates. Although you may choose to get the loan instead of staying without a car, you should keep in mind that a big chunk of your monthly payment goes toward paying interest and not the principal. Shop around to find the cheapest lease deal that you can qualify for. Alternatively, you can build your credit score to help you are eligible for a lower interest rate.

Loan rollover

Some dealerships can promise to pay off your loan balance to entice you into getting a new car. Although they will help you get a new car, you should keep in mind that the loan balance will not disappear. Instead, they include it in your new loan, which makes your new vehicle more expensive. For example, if the new lease is worth $23,000 and you are $2,000 upside down on your current loan, the dealership will roll over the $2,000 and give a loan of $25,000 instead of $23,000. In such a case, you should expect to pay more interest rate. Avoid rolling over your loan balance as it will make your new loan more expensive and put you more underwater.

High financing fees and costly upgrades

We advise that you thoroughly review all the applicable fees before putting pen to paper on a lease offer. Some dealerships will include high transaction fees in an attempt to make more profit. Negotiate the fees, and it is possible to ask for transfer fees exemption to lower the cost of your lease. You also do not have to opt for upgrades that are unnecessary as they will increase your loan with tangible benefit on your car’s value. It is a good idea to pay for the enhancements upfront to avoid negative equity.

How To Get Out Of An Upside Down Car Loan

Since being underwater is not a desirable situation, there is a need to take the necessary steps to get out of an upside-down loan. You might not have to do anything other than make monthly payments if you got a fair deal on your loan. Making prompt monthly payments for a few months is all some people need to move from negative to positive equity. That said, if you are looking to trade in your car or you can no longer afford the monthly payments, you will need to look for solutions on how to get out of an upside-down car loan.

1. Continue making payments

The simplest way to get out of an upside-down loan is to continue making your monthly payments until the loan balance is lower than the car’s value or you own it. This strategy allows you to keep the vehicle and build your credit as you make your payments. Unfortunately, you will need patience and time for this strategy to work. The goal is to keep the vehicle until you build equity, which ensures that you will have a loan balance if you sell it. We recommend that you buy GAP insurance to protect you and your investment as you build equity. The GAP insurance covers the difference between your loan, and the insurance policy compensates if the car gets totaled.

2. Pay extra amount every month

If you are doing well financially, you can pay extra money with your monthly lease payment. The extra payment will help you get out of an upside-down car loan quicker as it goes towards the loan principal. This tactic requires patience and time before you can build equity. The dealership may also charge a fee if you pay off the loan early.

3. Pay off the balance with your savings

Paying off the negative equity is the quickest way to get out of an upside-down car loan. It is a good option if you have substantial savings and you need to get rid of the car. However, you may attract an early termination fee.

4. Refinance an upside-down loan

Refinancing your upside-down loan is a good option if your current loan has high rates or extended duration. You should consider refinancing if the loan terms for your new loan are favorable. If your credit scores have improved and you can qualify for a lower rate, we advise that you refinance your vehicle as it could help you save on your loan and build equity.

5. Sell to a private party

Although selling your car to a dealership offers a quicker way to dispose of your car, you will not get the best value from a dealer. Dealerships buy vehicles at a wholesale price to enable them to make a profit. On the other hand, looking for a private buyer takes time, but it offers the best value. For example, if your car’s buyout price is $10,000 and you are $5,000 upside down, the dealership will give you $10,000 and leave you with a $5,000 balance. If you look for a private buyer, you may find an individual ready to pay more for your car than the dealer. However, this strategy leaves you without a vehicle to use for your day-to-day activities.

How To Avoid An Upside Down Car Loan

You should avoid an upside-down auto loan as much as possible. We recommend that you carry out thorough research to understand the financing, costs and taxes. A good lease deal should not be more than four years. It should have a 20-percent down payment and affordable monthly payments. It is also a good idea to negotiate the buyout amount and ask for dealers’ and manufacturers’ incentives to help make the purchase more affordable. You should further avoid trading in your car early into your lease to avoid balance roll over into your new loan. A loan rollover makes you more upside down on your new loan.


Getting a new car is exciting, but you must be careful as the joy of driving a newer vehicle can push you underwater. While you may only need to take your car to a dealership to get a newer model, the dealer will roll over the balance into your new loan, which means you will need to pay more for your new loan. You should avoid trading in your auto until you build equity. We also recommend that you put a down payment on your lease.

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