A vehicle loses 20% of its value the moment it’s driven out of the dealership by the owner, and by the third year, your car has lost 50% of its value. Owe unto those that took financing to get their new car, they have just increased their chances of having an upside-down car loan. You may also be thinking about refinancing your car, but someone has said that you do not qualify for the auto refinance; this is probably because your loan is upside-down.
So, what is an upside-down loan, how bad is it, and how can work get out of such a situation? Read on for more information.
What Is an Upside-Down Auto Loan?
According to Lantern by SoFi, “An upside-down car loan happens when the amount the lenders or financial institution owes you is more than your car’s worth. It is not always a big deal for those who plan to pay their loan entirely, but it hinders a lot of things.” For example, if you want to trade-in your car, you would have to pay the difference commonly referred to as negative equity. When your car is totaled, you must also pay the negative equity. This negative equity makes it very hard to receive auto loans, and when one gets the interest rates imposed are too high.
If you buy a car without a down payment, if you get financing that offers you an extended payment period of over 84 months, and maybe you have taken an auto loan with very high interest. If you keep paying more on the interest than the principal amount, you will get negative equity or an upside-down auto loan and rollover loans.
How To Get Out of An Upside Down Car Loan
The only time one cannot get out of an upside-down car loan is when their car is totaled from a wreck, and it needs to be sold fast. Otherwise, here are some strategies on how to get out of an upside down car loan:
Continue Making Payments Until You Pay Them Off.
Repaying the loan until you own the car or the car value is higher than the loan is the best way out of an upside-down loan. This is because you can have equity in the vehicle, and if you decide to sell it, you will not experience financial setbacks.
Makes as Many Payments as Possible
Making extra payments every month towards the loan principle allows you to pay the loan amount faster and build equity.
Get Gap Insurance
Getting gap insurance is critical because if your vehicle is totaled, the insurance will cover the amount between what the insurance company will pay for the vehicle and what you owe on loan.
Refinancing your vehicle will ensure that most of your payments go into repaying the principal amount. Refinancing will also offer you lower interest rates and a shorter repayment time, ensuring that you quickly gain equity on the vehicle.
Keep Away from Upside-Down Car Loans.
It’sIt’s almost inevitable to get out of an upside-down car loan at the beginning of your loan, but you can quickly get out of negative equity and build up good credit with time and using the strategies above.