Many people purchase cars with bank or dealership financing, and may put little to no down payment on it. This can quickly result in what is called an upside down car loan. When a loan goes upside down it means that the person owes more money than the car is worth. Attempts to sell the car would leave residual amounts owed that the person with the loan would have to pay.
The upside down car loan is actually a fairly common thing in auto financing. Estimates differ, but reports on American car loans suggest that about 30-40% of loans for new cars are presently upside down. There are a number of reasons why this occurs.
First, if the car is new, driving it off the lot depreciates it significantly. Any car considered used is of less value than one considered new, even if the car is barely used. Second, people usually don’t place high enough down payments on their vehicles to prevent an upside down car loan. Third, many people are attracted by low monthly payments that will keep the loan upside down for a while because the payments aren’t covering much more than interest in the early years of the loan.
There are other factors that can create an upside down car loan. These can include when a person trades in another vehicle as part of a down payment and doesn’t get paid enough for that vehicle. Alternately, some people trade in a car that they still owe money on, and this debt is transferred to the new car loan, which can mean the new loan is automatically upside down and may remain so for a while.
Many new car buyers expect that they will acquire an upside down car loan for the first few years of paying off a car. If the person intends to keep the car for a long while, this might not concern buyers greatly. On the other hand, if the car is only going to be used for a few years and then sold, consumers may be better off looking at ways to keep the loan from becoming upside down.
There are a few ways to help prevent an upside car loan. One suggestion is to avoid buying new cars. By buying a car that is a year or two old, consumers don’t get that automatic large depreciation in value when they leave the lot. Another thing to do is place a sizable down payment on the car, in the nature of 20-30% instead of the average 5%, and definitely people should avoid deals where no down payment is required. People may also choose vehicles that don’t depreciate rapidly; certain grand brands retain their value more than do others.
If a person is selling a car or using a trade in, they may get more money by selling the car privately than they would from a dealer. This can help increase down payment and give people more bargaining options. Something else to be avoided is low monthly payments, which can keep the loan in an upside down state for a longer period of time. Those with good credit can shop around for best interest rates or even try to renegotiate a current car loan for lower interest rates.
Those who want to get an upside down car loan right side up quickly, should consider shopping around for a new car loan, as mentioned above. The other thing that can quickly help is to make larger payments than those required and indicate these payments are to be paid to the principal. Make sure to ask the current loan company if they accept early payments or will apply them to the principal.
Though an upside down car loan can be challenging for those people who want to get rid of a car, it is a fairly normal thing. It doesn’t make good financial sense to let a loan go upside down, but for some people, it is virtually unavoidable. In places like the US, most people rely on cars greatly, and may need to live with an upside down loan in order to have a convenient means of transportation.
