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Guide to Upside Down Car Loans

Upside Down Auto Loan: What Is It? How to Get Out of One?; If you owe more than your car is worth, you are "upside-down" on your car loan. Lantern by SoFi will show you what this means and how you can get out.
Susan Guillory
Susan GuilloryUpdated September 19, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you’re thinking about refinancing your auto, you may have been told that you have an upside down car loan and don’t qualify for a refinance. If that’s the case, you may well be scratching your head.What are upside down auto loans? Are they bad? And how do you get out of one? For that matter, how can you avoid getting into one in the first place? Read on for the answers.

What Is an Upside Down Auto Loan?

To say you are upside down on a car loan means that your car is worth less than the remaining amount you owe on the loan. You might also hear this called being underwater on the loan.There are several ways you could end up with an upside down car loan. You might have bought your car without making a down payment. Or you might have gotten an extended period, like 84 months, to pay off your car. Or you may have taken out a loan with high interest and find yourself paying more in interest than on the principal.Recommended: Car Loan Terms Explained

What Can I Do With an Upside Down Car Loan?

If you have an upside down car loan, it can limit your car-related financing options. It may prevent you from being able to refinance your vehicle. That’s because most lenders don’t want to finance a car for more than it’s worth.If you are able to refinance with an upside down car loan, you may have to pay extra fees or higher interest rates, which will add to the cost to refinance a car.If you’re trying to sell your car while you still owe on your car loan and you can’t refinance for the difference, you may have to pay off the old loan out-of-pocket before you can buy a new car.

What is Considered an Upside Down Car Loan?

A car loan is considered upside down if you owe more than the car is worth.If you’re trying to figure out whether your car loan is upside down, you can find the current value of your vehicle on a website that gives car values, like the sites for the National Automobile Dealers Association, Edmunds, or Kelley Blue Book. You might want to check the value on a few websites, since there’s not one absolute authority on determining the value of your car. You could then take an average of the values you get across the board to use as your ballpark figure.Then compare that value to what you still owe on your car loan to figure out whether your loan is upside down. If the value is lower than what you owe, your loan is upside down.

Upside Down Car Loans and Refinancing

Upside down car loans and refinancing might not mix well. Below we highlight why this may be the case:

Can You Refinance an Upside Down Car Loan?

Let’s say you’re upside down on your current car loan and you’re looking to refinance to pay off the difference between what you owe on your current auto loan and the car’s value so that you can sell it. Know that, in this situation, it may be difficult to find a lender willing to let you borrow money for the refi.If you’re looking for a cash out auto refinance, which lets you borrow a little extra against the equity you’ve built in your vehicle, you probably won’t qualify. That’s because you have what’s called negative equity.When your car is worth more than you owe, you build positive equity. That means that your car is an asset that you could sell, since it’s not under lien with a lender (or at least not all of it is).For example, if you still owe $5,000 on your car loan but the car is worth $10,000, you have $5,000 in equity. If you’re looking to refinance, having equity is attractive to lenders. That’s because if you couldn’t pay off the loan, you’d have enough in equity to cover what you owe.However, if you have negative equity, you might owe $10,000 when the car is valued at only $5,000. Let’s say you took out a loan and couldn’t pay it at all. The lender would be stuck with a car that wouldn’t cover your defaulted debt. Negative equity can make it very difficult for you to refinance auto loan bad credit upside down debt.

Would Refinancing While Upside Down Hurt Your Credit?

Subprime borrowers may qualify for bad credit refinancing, but one thing to consider with refinancing when you’re under water is your credit score. You may wonder, “Does refinancing affect my credit score?” It could.Every time you take out a loan (or even apply for one) your credit can be impacted if the lender checks your credit report. Credit scores typically consider how much debt you have, among other factors. If you already have an upside down car loan for $10,000, let’s say, taking out another loan on top of that could drop your credit scores down even more. And if you aren’t able to pay on a loan, you might default, which is a negative mark on your credit report.

5 Tips for Avoiding Being Upside Down on a Car Loan

Here are five tips on how to avoid being upside down on a car loan:

1. Trying to Get a Lower Interest Rate

If you need financing for a car, getting a lower interest rate can save you money over the life of your loan. A higher annual percentage rate of interest can make your loan more expensive to repay. Shopping around for the lowest interest rate can help you avoid getting to the point of being upside down on a car loan.

2. Don’t Choose the Longest Repayment Term

Getting the longest repayment term possible can minimize your monthly payment. But long-term car loans, including 12-year auto loans, may have higher interest rates than loans with shorter terms.Given that cars generally depreciate in value, there’s a good chance that you’ll end up upside down if you choose the longest repayment term. Choosing loans with shorter repayment terms may be right for you if you want to avoid going underwater.

3. Improving Your Credit Score

To avoid becoming upside down on a car loan even if you have bad credit, start by working on your credit. You might consider making a point of paying any credit cards or existing loans on time each month and lowering your debt-to-credit ratio. You may also want to try waiting to purchase a car until your credit has improved, or opting for a used one so that you can get a smaller loan that may be easier to afford.

4. Paying a Higher Down Payment

Making a larger down payment on a car may prevent you from getting an upside down car loan. A larger down payment can minimize your borrowing costs and monthly payment. A higher down payment can also bolster your equity stake in the car and help you avoid going underwater.You may not need to worry about how to get out from under a car loan that’s underwater if you make a sizable down payment. A lender calculating car loan APR may offer you a lower interest rate based upon the size of your down payment.

 5. Financing a Car Within Your Budget

You may choose a budget that works for you when seeking auto loan financing. This can include identifying a target purchase price for a new or used car and sticking to the budget. Financing a car within your budget can help you avoid buying a car that gives you negative equity.If you’re drowning in car loan debt, you may wonder, “Can someone take over my car loan?” Transferring an auto loan can be a complex process, but it may be an option for you.Consumers may ask, “What happens to car loans when someone dies?” The answer is that car loans do not simply disappear when a borrower dies. A surviving spouse may be responsible for paying the debt, or a lender may move to repossess the vehicle.

5 Ideas for Getting Out of Upside Down Auto Loans

Here are five ideas on how to get out of an upside down car loan:

1. Find Out What Your Negative Equity Is

The first step on how to get out of upside down car loan debt is finding out what your negative equity is. As mentioned earlier, you can use car appraisal website resources from Edmunds, Kelley Blue Book, or the National Automobile Dealers Association to estimate the current value of your vehicle.Equity is the appraised value of your vehicle minus any outstanding loan balance you owe on the car. For example, having a vehicle worth $10,000 while carrying a car loan balance of $12,500 means you have $2,500 in negative equity in the vehicle.

2. Communicate With Your Lender

You may also communicate with your lender to discuss options on how to get out from under a car loan that’s underwater. You could contact your lender to ask how to get out of an upside down car loan. There may be repayment or refinance options you wouldn’t have otherwise been aware of.

3. Don’t Stop Your Payments

One potential path on how to get out of an upside down car loan is by paying down your balance aggressively to chip away at your outstanding debt on the loan. Making payments on your car loan can be a recipe for how to get out of a bad car loan that’s underwater. In other words, don’t stop your payments if you hope to right the ship above water. Lenders may impose late fees if you fail to make a timely payment on your loan. But lenders may also honor a car payment grace period before such penalties would apply.

4. Refinancing Your Auto Loan

If you’re a subprime borrower with negative equity in a car, it might be difficult for you to refinance auto loan bad credit upside down debt. If you already have an upside down car loan and are trying to figure out how to refinance your auto loan, start by paying off more than is due on your monthly payments. That can help you chip away at what you owe and get that amount lower than the car’s value.Refinancing your auto loan doesn’t eliminate your underlying burden of debt. If you owe $12,500 on a car loan, refinancing would still require that you repay $12,500 in principal. Refinancing, however, may provide you with better terms and conditions that are right for you.Refinancing replaces your existing car loan with the terms and conditions of a new loan agreement. Refinancing in some cases may give you a lower interest rate and lower monthly payment.To qualify for auto loan refinancing, you may need to meet certain standards of creditworthiness, and your vehicle may need to meet certain standards of maintenance. If your vehicle has more than 125,000 miles on the odometer, it may be difficult to get a high mileage refinance.

5. Selling an Upside Down Vehicle

Selling your vehicle or trading a car in can be difficult if you’re underwater on a car loan. Having secured car loan debt means a lender provided you with financing and placed a lien on the vehicle as a security interest.  Lienholders may seize or repossess your vehicle if you default on a secured auto loan. You would need to repay the lender in full to remove the lien. Selling the vehicle may be an option if you find a buyer who is willing to pay off your lien. In this case, you may have to repay the buyer an amount equal to your negative equity.Selling an upside down vehicle can be difficult, but it might be an option for you to explore if you have no need for the vehicle. Selling may be easier if you have an unsecured car loan. The difference between secured vs. unsecured auto loans is that the vehicle serves as collateral on the secured loan, while borrowers pledge no assets as collateral on an unsecured car loan.

The Takeaway

Being upside down in a car loan can put you at risk. If you were to total your car in an accident, you might still owe on the loan, even if the car is scrapped. And then you’d likely have to try to take out another loan for a new car.It can be a good idea to do your best to avoid getting underwater on your auto loan by paying as much as you can afford, building your credit to qualify for better rates, and considering less expensive cars.Ready to explore auto refinance rates online? Lantern by SoFi can help. Compare offers that you may qualify for from our network of lenders.
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Frequently Asked Questions

What is considered an upside down car loan?
Can you get out of an upside down car loan?
How do I get out of an upside down car loan with bad credit?
Can I get a new car if I'm upside down?
Will dealerships pay off negative equity?

About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
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