It’s stressful enough having a car loan over your head and staying on top of your monthly payments. But what if you have an upside-down car loan — in other words, the amount you owe on your set of wheels is higher than its actual value?
It might happen if you had offered a small down payment. And as the value of the car depreciates, the total amount you owe on the vehicle ends up being higher than what it’s worth. A car can depreciate up to 10 percent of its value within the first month, according to Carfax, and up to 20 percent after 12 months of ownership.
And to make matter worse, let’s say your financial situation takes a nosedive. Maybe your employer lays you off, or you get divorced and your ex-spouse starts receiving half your paycheck. If you feel like your back is up against the wall, not to worry. There are some options for you to alleviate the financial burden if you’re upside-down on your car loan:
Sell Your Vehicle, Pay the Difference With Cash
That’s what Bryce Matheson decided to do a few years back when he was $6,500 upside-down on his Toyota Camry. While he owed $19,000 on the car loan, it was only worth $12,500. So he sold the car, put the money he made toward the loan, and worked hard on paying off the difference, which was $6,500.
To get around, Matheson borrowed his parents’ 2003 Honda Accord with 160,000 miles on it, The move saved Matheson, who was 23 at the time, $700 a month. “[The Honda] was quite a significant downgrade, but that was really what got me out of it,” says Matheson, who runs Sane Cents. “I had to buckle down, and just make those payments each and every month through gritted teeth.”
If you’re considering going that route, you’ll probably net a better price if selling privately than through a dealership, explains Matt DeLorenzo, senior managing editor of Kelley Blue Book. “That’s because any guaranteed purchase or trade by a dealer factors in the dealer’s cost of detailing the car, marketing it and keeping it on his lot until it sells,” says DeLorenzo.
Note: You’ll Need to Figure Out a New Loan Agreement
If you sell the car you’re upside-down on, lenders don’t generally don’t allow someone else to just start making payments on your behalf, explains Todd Christensen, education manager of Money Fit. The lender will require a new loan agreement with the new party involved.
“If you are upside-down on the loan, don’t expect Joe or Jane Public to be interested in paying more than what the car is worth,” says Christensen. You’ll most likely have to make loan payments on whatever the car is upside-down on, or come up with a special arrangement with the person buying the car. Before you put the car up for sale, talk to your lender and see what arrangements are possible.
Trade-In Your Car
You can also trade in your car to the dealership for a less expensive set of wheels. Note that like selling your car, you’ll still be on the hook for paying off the remainder of the loan. But owing $5,000 is far more manageable than owing $12,000.
Refinance Your Loan
This might be tough to pull off. As the vehicle is a depreciating asset, there’s not too much wiggle room other than pushing out your payments to a longer term to lower your monthly payments, explains DeLorenzo.
You’ll have a hard time refinancing for a reduced interest rate. While this might have you paying more interest fees overall, the smaller monthly payments could help you stay afloat. Of course, you’ll want to use a loan calculator to determine whether this is the best option for your situation.
Work Out a Deal With Your Lender
Besides refinancing your car, work with your current lender to see what your options are. Explain your financial hardship, and ask if they are willing to work with you. “Lenders are not in the business of repossessing vehicles,” explains Christensen. “They’d rather work out a reasonable repayment plan than go through the hassle of repossessing and selling a vehicle at auction.”
Another pro tip? If you are in good standing with the lender — meaning you haven’t missed or been late on any car payments — you have a better chance of working something out with the lender that’s more in your favor.
Find Ways to Keep Up With Your Payments
If you’re struggling to make your monthly payments, see if you can either slash living expenses or earn more, suggest Matheson. For instance, pick up an extra shift at your job, or put in some overtime. Think about how you can add value to your job so when annual reviews roll around, you can make a case for why you deserve a raise. Or you can earn extra dough by way of a side hustle.
“To slash costs, live well below your means,” says Matheson. “Ditch cable, sell your phone if you have to, or stop eating out until you have that thing paid off.” You can also commit to putting some of your tax refund toward paying off your car. Or make a pact to put any other “extra cash,” say, from birthday or Christmas gifts, or end-of-year bonuses, toward your car.
While you might be drowning in car payments, the best thing to do is avoid being upside-down in the first place, points out DeLorenzo. “Look closely at your financial situation when buying car, and opt for the vehicle that’s in the next class or price category down from what you think you can afford,” he explains. “While the salesperson will pressure you to get a bigger vehicle or more options just because it’s only $50 or $100 more per month, that adds up to real money over the life of a five-year-loan.”
You don’t have to feel as if you’re stuck with a car payment you’re having trouble keeping up with. It’s certainly a less-than-ideal scenario. But figuring out which option is best for you and your current needs requires weighing the pros and cons of each one, and knowing what’s doable for your current situation.