What to Do About an Underwater Car Loan?

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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You purchased the car of your dreams and now owe more than it’s worth. But, before panic mode sets in, rest assured that you may have options to remedy the issue. Read on to learn more about underwater car loans, how they’re created, ways to prevent them and what to do if you find yourself in this situation. 

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What Does It Mean To be Underwater on a Car Loan? 

Underwater car loans can be a financial headache, especially when it comes time to sell your vehicle or trade it for a used or new car. But what exactly does the term “underwater” mean? 

Simply put, if you’re underwater on your car loan, the vehicle’s value is lower than the outstanding loan balance. So, if your car is worth $25,000 and you owe $32,500, you’re underwater or “upside-down” on the loan. And should you decide to swap it out for another vehicle, you’ll have to pay the difference out of pocket. 

How You Get Underwater on Your Car Loan

Several circumstances can cause you to be upside-down on your auto loan. 

Not Enough Research 

Did you do your due diligence when purchasing the vehicle? If not, there’s a possibility that you paid more than it was worth and are now underwater on the loan. 

High-interest and Long-term Loans 

Cars are depreciating assets, and some lose value faster than others. Depreciation, coupled with a steep interest rate and extended loan term, means it’ll take you longer to repay what you owe, and the principal balance will decrease at a slower pace.  

No-money Down Loans 

It can be tempting to finance a vehicle without making a down payment and keep more of your hard-earned cash in your pocket. The problem is most vehicles drop in value by at least 10 percent by simply driving them off the lot, which means you’ll have an underwater car loan right away unless you buy it for far less than what it’s worth. 

Roll-over Loans 

Did you swap out your old vehicle for your current one? If it wasn’t paid in full and you opted to roll what was owed into the new loan to avoid having to come out of pocket, you’ll likely owe far more than your current car is worth.  

Unnecessary Add-ons

Even after negotiating a good deal on a new ride, the dealer may tempt you with extras to make your car shine. Unfortunately, they could add an unnecessary boost to your monthly payment and make the sales price more than the vehicle is worth. 

Expensive Car

Buying a luxury ride can make you feel like you’re on top of the world, but be mindful of the loan terms. Otherwise, you could find yourself with a ride that shines in the sunset but depreciates at a rapid rate far greater than the monthly payment amounts. 

How to Avoid Becoming Underwater on Your Car Loan 

Fortunately, there are ways to avoid getting underwater on your auto loan. 

Determine the Value of Your Car

Conduct research to get a realistic valuation of your car. Refer to Edmunds and Kelley Blue Book as they offer resources to make determining the value of any vehicle easier, regardless of its condition. 

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Know How Much You Owe

Refer to your monthly auto loan statement or the lender’s dashboard to view the outstanding balance of your loan. It’s also a good idea to reach out to the lender and request the “payoff balance,” as it could differ slightly from what you owe. 

Compare Your Car’s Value to What You Owe 

Deduct the payoff balance from the value of your car to determine if you’re in the clear or close to being underwater on your auto loan. If you haven’t taken out your loan yet, a higher down payment now may help prevent your loan from going upside down later (and possibly get you a better rate, depending on your lender).

How to Get Out of an Underwater Car Loan

If you find yourself with an underwater car loan, these strategies can help you get the relief you need.  

Negotiate with Your Current Lender 

The lender may be willing to adjust your loan terms through what’s referred to as a loan modification. It’s handled in-house, and you won’t have to worry about refinancing with another lender.

Make Additional Payments 

Analyze your spending plan, make cuts to free up funds and make additional principal payments. Doing so can help chip away at the difference between your car’s value and what you owe, assuming the lender doesn’t assess prepayment penalties.  

Consider Selling Your Car

You can try selling your car privately, as you’ll likely get far more for it than you would by trading it in at a dealership. But before you list it, get any maintenance issues resolved and have it detailed to attract the right buyers.  

Get GAP Insurance

Guaranteed Asset Protection (GAP) insurance pays the difference between your auto loan balance and your car’s value in the unfortunate event your vehicle is totaled in an auto accident or if it’s stolen. Consider purchasing it to shield you from the potential adverse effects of depreciation. 

Refinance Your Car 

Finding a lender who’ll refinance your car can be challenging if your loan is underwater. However, you can take the necessary steps to remedy the issue. 

Refinancing your auto loan may be the best way to get a more affordable payment and possibly get rid of the balance much faster than you would with the original loan. 

Auto Approve can help you get the job done by matching you with lenders in its network that offer some of the lowest interest rates you’ll find in the industry. You can get a rate quote with no impact on your credit score. Select the best offer, and the Auto Approve team will handle the rest of the process for you. 

Visit the website to learn more or view potential loan offers that may be available to you

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