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What Is an Upside Down Auto Loan and How Can You Get Out of One?

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 Guillory

Updated July 7, 2021
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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. It’s part of auto loan terminology that it can be helpful to know if you’re trying to refinance. 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 be paying more in interest than on the principal.

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

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.Another 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. 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.

How to Avoid Being Upside Down on Your Car Loan

So how can you avoid getting to the point of being upside down on a car loan? First of all, know that if you have bad credit, you’re more susceptible to this happening. Because you may not be able to qualify for a low-interest auto loan through a bank, you may only be able to get one directly from the dealer. That loan will, more than likely, have higher interest.Or you might have opted for the longest repayment period possible so that your monthly payments would be low. Again, these loans tend to have higher interest rates. Given that cars depreciate in value so rapidly, there’s a good chance that you’ll end up upside down.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.

How to Get Out of an Upside Down Auto Loan

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.You could also 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.If you want to purchase a new car, you might wait to get out of the upside down car loan before doing so. And you might consider a less expensive or used car instead. A shiny new car might be your dream, but if it puts financial strain on you, it can quickly become a nightmare.

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 refinance your auto loan online? Lantern by SoFi can help. Compare offers that you qualify for from our network of lenders. 
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit ( tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0521083

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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