Test drives can convince even the most skeptical of us that we’ll like a specific vehicle.
It’s clean. The salesperson at the car lot is full of positive energy. You get handed the keys and get to hit the open road, or at least the nearby highway, as if you’re a local celebrity.
But what happens if you buy a vehicle that you later decide you don’t actually like? Especially if you owe more money on your auto loan than the car is worth?
Can I Trade in a Car When I’m Upside Down on My Loan?
I don’t like my vehicle. But I owe more money on my auto loan than I’d get by trading in my vehicle at a dealership for another one.
Is there anything I can do about being upside down on my car so I can get what I want without hurting my wallet?
That’s what a listener asked money expert Clark Howard recently.
Asked Juanita in Florida: “I purchased a car in April. I’m no longer in ‘like’ with this car. I would like to trade it in to get another one, but I will be so upside down I do not know where to start.
“Can you give me any advice on how to go about trading my current vehicle in to get another one? What is the best way to save some of the overage from the trade-in vehicle? Thank you Uncle Clark.”
You have options to get to the point where you’re no longer upside down on your vehicle loan. But the real decision point for today is simple.
“You’re not gonna like this. It’s best for you since you’re already in this vehicle [and] you’re going to be horribly upside down to get out of it, just look at it as transportation and ride it through,” Clark says.
“It’s very common that people will get a vehicle and later be like, ‘Wow, I thought that was a good idea. I hate this thing.’ But the consequences of ditching one you bought months ago are so brutal financially.”
What Does It Mean To Be Upside Down on Your Car Loan? And Why Does It Matter?
Reports vary, but data generally shows that new cars can depreciate in value as much as 10 to 20% when you drive them off the lot.
So if you needed an auto loan, you didn’t put a lot of money down and you’re paying considerable interest, you may owe more money on the vehicle than it’s worth.
Consider also that you may not get the true market value of your vehicle if you try to trade it in for a different vehicle at a dealership.
Let’s say you owe $40,000 on a vehicle. But you don’t like it. You go to a dealership and they offer you $30,000 for the car. You are $10,000 upside down.
Now let’s suppose the car you would rather drive is another $30,000. You’re going to owe $40,000 for the $30,000 car due to the amount you are upside down on your trade-in vehicle.
With a four-year, 6% interest loan and a $4,000 down payment, you’d pay nearly $45,000 for a vehicle that is worth $30,000. That’s assuming you get a good deal at the dealership and that the car value doesn’t go down significantly in the months after you drive it off the lot.
Avoid Rolling Negative Equity Into Your New Loan
Clark doesn’t want you to take your negative equity on the first car and stack it into a new auto loan.
“I don’t recommend you go into something where you’re doing what they call a roll-in. You’re rolling in the amount you’re upside down into a new loan where you have enormous – what’s known as negative equity where you owe far, far more than what the vehicle is worth,” Clark says.
“So I would discourage you from trading in the one you’ve got on such a short cycle.
“Suffer through it. Because your wallet will benefit so much more from you just riding through with this thing you don’t like.”
Why Being Upside Down Is Dangerous
If you owe more on your vehicle than what it’s worth, a car accident can be devastating. Typically if your car gets totaled, your auto insurance sends you money. Imagine totaling your car and then owing your lender $10,000 immediately.
If you want to downsize to a cheaper vehicle, you can’t simply trade in your car for one that’s worth less. The difference between what you owe on your original vehicle and what your original vehicle is worth will get rolled into your loan payments for the cheaper vehicle.
By being upside down, you’re essentially limiting your flexibility to change vehicles without getting into an even worse position financially. And you’re also taking a big risk in case of a car accident.
How To Fix Your Situation if You’re Upside Down
You’re upside down on a car. What now?
The first thing you should do is to calculate exactly how much you’re upside down. If it’s a small amount, you’ll be able to correct it much easier.
Here are some options to consider:
- Use a lump sum to pay off the difference. If you have the financial means to do so, you can end your predicament in one power move. Calculate how much you’re upside down. Then make a one-time payment on your loan for that amount. Or use the money to get rid of the amount you’re upside down when you’re selling or trading in your vehicle.
- Make extra loan payments toward the principal. This option is more realistic for many people. Put extra money toward your principal every month by making more than the minimum payments. Just make sure the extra amount you’re paying is enough to overcome the depreciation in your vehicle’s value over time.
- Refinance your loan to a much shorter term. The longer your loan term, the more likely you are to be upside down on your car. That’s because you’ll still owe a lot of money after your car depreciates significantly. Shortening your loan term by years will increase your monthly payments but can change the “you owe $X” to “it’s worth $Y” math at least to a degree. Clark says you should never take an auto loan with a term longer than 42 months.
- Sell your vehicle privately. You’re likely to get the best possible price for your vehicle by selling it privately. This requires extra work and patience. But if you’re desperate to get rid of your vehicle, maximizing the amount you get for selling it will help.
Try to avoid getting upside down on a vehicle in the first place. But if you’re there, the best thing you can do is to keep that vehicle and continue making payments.
Make extra payments if you can. And try to avoid getting distracted by a shiny new vehicle that will require you to roll in money you still owe on your current vehicle into a new auto loan.