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Upside Down Car Loan
If you have an upside down car loan, then this article is for you. If you are tired of having to make car payments, if you are tired of feeling like you have more car than you can afford, if you are tired of feeling like all of your money is tied up in your car or that all of your money is going to build the wealth of the bank or the car dealer and not your own wealth, then read on!
Having an upside down car loan can be an uncomfortable and even scary place to be. But there is a way to get out—you don’t have to be stuck in a car you can no longer afford or that will no longer work for you or your family. Read on to learn how to get out of debt on an upside down car loan.
Also check out how to buy a (nice!) car for cash! It will change your world!
Learn how to get out of an upside down car loan for good!
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The Problem with Car Payments
If you live in America today and own a car, you probably have a car payment. In fact, there’s a good chance that you’ve never even thought about buying a car without having a car payment.
But as I mention above, the problem with car payments is that they are an excellent way to keep you broke your entire life. By spending all your money on your car you may have a fancy car or a brand-new car or what you feel is a super safe or reliable car, but you are also giving up your financial freedom to the bank or the car dealership, and you are very possibly paving the way to stay broke and in debt your whole life. And that is no way to live!
There is another—and better! :)—way to live. And it’s to be car-debt free.
So let’s talk about how you can get out of your upside down car loan and stay out of car debt forever!
Check out these related articles:
- 35 Ways to Slash Your Transportation Costs
- 7 Best Tips to Save Money on Car Maintenance and Repairs
- How to Buy a Car with Cash (and Never Have Car Payments Again!)
- How to Save Up to Make Large Purchases with Cash
- 33 Must-Know Tips to Save Money on Housing
- 12 Top Tips to Save Money on Entertainment
- 73 Simple Ways to Slash Your Grocery Budget—without Coupons!
What Does It Mean to Be Upside Down on Your Car Loan?
If someone is upside down on their car loan, that means that they owe more on their car than it is worth. This can happen, for example, when someone rolls over the previous balance on their old car loan into their new car loan when they buy their next vehicle.
So, say that you owed $3,000 on your car, but you decided you wanted to buy a newer car for $11,000. So let’s say you didn’t have the cash to pay off the old car loan, and so you rolled the car loan for your old car into the loan on the new car, and so instead of having a car loan for $11,000, you would have a car loan of $14,000. And if the car was only worth $12,000, then you would be upside down on your car by $2,000
Think You Might Have an Upside Down Car Loan?
To find out for sure if you’re upside down on your car, go to a website such as kbb.com (Kelley Blue Book) or edmunds.com and fill in the information for your car (make, model, year, mileage, and so forth).
If you determine that you really are upside down on your car loan, then your best option might be to hang on to your car until you can pay down the loan enough that you aren’t upside down anymore.
However, if you are in a position where you feel you really need a different vehicle, then if possible, you should pay the difference of what your car is worth and what you owe on it with cash.
You can pull the money from savings if you have it (and even use your emergency fund if you really feel you need to), or you can work to earn the extra money as quickly as you can by working overtime, picking up an extra job, or doing a side hustle.
What to Do If You Have an Upside Down Car Loan
1. Sell the Car
If you are upside down on your car and you don’t have the cash to pay the difference or the means to earn the cash, it often makes sense to sell the vehicle and take out a small loan from your local credit union or community bank to pay off the difference if you are willing to buy a less expensive car in order to reduce or completely eliminate as soon as you can your monthly car payment.
2. (Temporarily) Buy an Inexpensive Car for Cash
I know this is probably a new idea to most of you, so let me restate that: even if you have to sell your car at a loss and take out a loan for the amount you still owe on it, that is often a good idea. The reason is this: by buying an inexpensive car (in the $1,000 to $3,000 range, for example) and then working very aggressively to pay off your loan for the difference on the money you owed on your previous car (minus what you can sell it for; sell it to an individual and not to a dealer to get the best price) and the small loan you may need to take out on the current car that you buy to replace the car you’re upside down on, you will still be way ahead financially.
Even with a small loan on an inexpensive car, you will still be way ahead of where you would have been had you tried to slog your way through paying off an expensive car loan (a loan for $7,000 or more, for example).
3. Pay Off the Inexpensive Car as Quickly as Possible
And then once you pay off as quickly as possible the car loan from the previous car (on the difference between what it was worth and what you could sell it for) and the small loan if needed on the get-around car (the $1,000 to $3,000 car you would then be driving), you can work to save up the money for a vehicle upgrade with cash (click to learn how!).
As a general rule I don’t advocate debt—but this is actually reducing your debt by going from, for example, a $14,000 car that you owe $16,000 on to a $2,000 minivan, where you take out a $4,000 car loan (if you can’t scrape the cash together or at least not all of it) to pay the $2,000 you’re upside down on for your current vehicle and the $2,000 to buy the new-to-you minivan.
Again, I know that you probably won’t want to drive a $2,000 vehicle forever, but you won’t have to stay in it for very long if you’ll then pay off the small loan very quickly so that you can start saving for a nicer, newer vehicle. Try to pay off the new, reduced car loan in less than a year. Since the average car payment is over $400 a month, there’s a good chance you’re paying this much already each month, and so it shouldn’t be too hard to accomplish this goal of paying off the loan on the inexpensive get-around car.
4. Save the Cash to Buy a Nice Car!
Then once you pay off the personal loan to the bank for the money you owed on your previous car and pay back the small loan you took out for your current vehicle if needed (the $2,000 minivan, in our example), then use that same amount you were paying each month toward that loan to save up in order to move up in car with cash—no car loan—in the next one to two years. I’ll show you how in the next section below—just keep reading.
But first, in summary, if you have an upside down car loan, follow these steps:
- Find out what your car is worth on Kelley Blue Book (kbb.com) or edmunds.com.
- Try to pay the difference between the value of your car and what you owe on it in cash.
- If you can’t pay the difference in cash, consider holding on to your car till you pay down the difference.
- If you need to get out of your car to pay off debt or purchase a bigger (or smaller) vehicle, buy an inexpensive car (with a small, low-interest loan if needed) and also take out a small loan if needed for the difference of what you owe on the previous car and what you can sell it for.
- Pay off the loan or loans as quickly as possible.
- Save up to move up in car with cash.
- Resolve to never be in car debt again.
How to Never Have an Upside Car Loan (or Any Car Loan!) Again
I know that this idea of not having any car debt is going to be completely foreign to some of my readers, but stick with me and this one piece of advice will literally change your life forever.
I’m not exaggerating. I know in our society today, as I mentioned above, that many people don’t even think about owning a car without having a car payment. But you don’t have to buy into this lie any longer. You don’t have to have a loan to have a good car. Beginning today, you can help change this trend in America and in the world.
And I’m going to teach you how to do it. It’s simple, even if it may be a little hard at first. (But I don’t think it will be too hard when you compare it to the huge benefits of being car debt free forever!)
Once you have gotten out from under your car loan, you can start saving up your money so that you can be your own bank for your future car purchases. That means that instead of paying the bank a car payment, you pay yourself a car payment every month. If you don’t have a savings account already set up for this, go to Capital One 360 or another bank or credit union where you can easily set up multiple savings accounts. Then you can start putting a little money into this account every time you get paid.
So once you’ve paid off the loan on the inexpensive car you bought to get around and on the leftover debt from your previous car, then you can use that same amount to pay yourself a car payment. If you can save $300 a month, for instance, from no longer having a car payment, you can buy a $5,500 minivan in a year. (That’s by saving $300 a month for a year; $300 x 12 months = $3,600 plus the $2,000 value of the current car = about $5,500.)
That’s still not a very fancy car, I know, but it’s definitely one that can get you around and be safe and comfortable and all of those things. And it won’t come with any payments! And then by doing the same thing for another year, you could buy a $9,000 car a year after that. (That’s $5,500 + $3,600 = about $9,000.) Do the same thing for one more year, and you’ll be in a car worth nearly $13,000, or hold on for two more years, and you’ll be in a car worth close to $17,000 after just four years of saving up and paying for your vehicles with cash.
If you want to have a vehicle that’s even nicer than that, then keep saving in this same way, and even add more to your monthly car savings fund over time. In just five years after buying your $2.000 get-around vehicle in order to work your way out of car debt, you would be in a $20,000-plus vehicle! And you can keeping saving this way indefinitely. No more vehicle loans ever!
If you’re a two vehicle-family and you want two nice, $20,000-plus vehicles, alternate car saving—every 5 years you can buy a $20,000 vehicle (plus the value that your current vehicle still has after the five years, so potentially $30,000 or more). And the end result? Two nice, paid-for vehicles!
Want to learn about even more ways to save money on car ownership? Read this article for 35 ways to save money on your transportation costs.
In most cases, if you possibly can, you should keep your car until the loan is paid off and not try to sell it when you have an upside down car loan. However, the exception to that is if you are planning to sell an expensive car where you are upside down and replace it with an inexpensive car so that you can get out from under an oppressive car loan. And then after that, once you’ve paid off the loan on the less expensive car, start saving to buy a more expensive car with cash, and resolve to be car debt free from here on out. It’s awesome!
Are you ready to get out from under your upside down car loan? Have you considered paying yourself a car payment before so that you can avoid car loans in the future? Are you ready to start doing that now so that you can buy your next car with cash and be free from car debt forever? Leave a comment below and let me know what you think about this idea; I would love to hear your thoughts!
Invitation to Share
Was there something in this article that inspired you to change something about your money? Are there ideas or tips that you feel could help others? Would you please take a minute to share this article via email or social media? I would love your help to share these principles of financial well-being. Thank you!
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