All is not lost if you find yourself upside-down on a car loan. Also called being underwater or having negative equity, being underwater means that the balance of your auto loan is higher than the value of the car. Having negative equity is no problem when everything's going right, and you still enjoy your vehicle. It becomes a huge issue when you lose your job and can’t make your payments, the car gets stolen, is declared a total loss by your car insurance company, or you want (or need) to sell it.
Read our guide to upside-down car loans to learn why having one is dangerous to your financial future.
The coronavirus crisis amplifies the issues with having an underwater car loan. First, unemployment is going to spike in nearly every segment of the economy, making it harder for people to make their payments. With reduced market demand, your car is probably worth less than it was before the outbreak. Within a couple of weeks, your underwater car loan may have moved from being a minor issue to one that can significantly damage your credit score if you don’t take action now.
We’ll talk about how the COVID-19 pandemic provides both challenges and opportunities in the last section of this guide.
Some ways are better than others when it comes to getting out of an underwater car loan. Do it wrong, and you can wreck your credit for years. Do it right, and you might not affect your credit score at all. Here are several ways to proceed. We'll start with the least damaging to your financial future and move to methods you want to avoid if at all possible.
- Determine How Far Underwater Your Car Loan Is
- Pay Your Loan Until You Have Positive Equity
- Cover Yourself With Gap Insurance
- Sell Your Car
- Refinance Your Loan
- Buy a New Car With a Huge Rebate
- Get a Side Job
- Trade Your Car In
- Avoid Risky Methods of Getting Cash
- Let Your Car Be Repossessed
- How Does the Coronavirus Change What You Need to Do?
Before you can determine the best route to get out of a car loan with negative equity, you need to figure out how far underwater you are. Subtract the book value of your car from the balance of your car loan. If the number is positive, you have positive equity and nothing to worry about.
If the number is negative, you have negative equity. If something awful were to happen to the vehicle, you would not get a check big enough from your insurance company to pay off the loan. If you want to get a different car, it would be hard to get enough money to cover the balance of your current financing. If you lose your job and can’t make your payments, you lose the option of selling your car and paying off the loan balance. Depending on the size of the negative equity, it's either a minor problem you could cover with savings or a major issue that could be a financial calamity.
Several websites can help you find the value of your used car. Our used car finder can show you what similar vehicles to yours are selling for in the marketplace.
By far, the best way to get out of an upside-down car loan is to continue making timely monthly payments until you work your way into positive equity territory. While most cars depreciate rapidly during their first few years on the road, the depreciation curve flattens out as the vehicle gets older. That makes it easier for your payments to outpace the vehicle's loss in value. As you pay off your loan balance, more of each payment goes toward principal and less toward interest. That shift also quickens the pace at which you gain equity.
Yes, this means you are stuck with your current car. That’s a far better problem to have than damaged credit or an even deeper financial hole you have to dig yourself out of. If you need to dip into your savings to continue making payments, and you can do so without depleting your emergency fund, it’s a good idea to do so.
Making an extra payment or adding a few bucks to each monthly payment will quickly help you gain traction toward positive equity territory. Adding a bit extra to each of your car payments will also shorten your loan term and reduce the total amount you pay in interest. Before you employ this strategy, be sure you check your loan documents to make sure there’s no prepayment penalty. Few auto loans have this clause.
There are other benefits to making each monthly payment in full and on time. Your lender will report that you are “paying as agreed” to the credit bureaus, which can improve your credit score. That, in turn, can give your score enough of a boost to let you refinance your car loan at a lower rate.
A rising credit score can potentially reduce your auto insurance premiums. You can use the cash you save to accelerate the payment of your car loan.
Insuring your car with gap coverage is a way to protect your finances from a devastating loss. Gap insurance is a product that covers the difference between your auto loan balance and the value of your vehicle. It is used in case of theft or declaration by an insurance company that your vehicle is a total loss after a collision. The policies are designed to protect the lender just as much as the borrower by ensuring the loan gets paid off.
It’s available from many insurance companies, lenders, and car dealerships. The costs and coverages vary greatly, so it's essential to read the contracts and shop around for the best deal. Note that gap insurance does not cover the difference if you sell the car. It typically only covers you up to a certain amount if your loan balance includes a rollover of another vehicle’s financing.
In most cases, gap insurance won’t help you if you’ve suffered a job loss or a reduction in hours that prevents you from making your car payment.
Our guide to gap insurance explains the coverage in detail.
Another way to get out from under an upside-down car loan is to sell the vehicle, then use the cash to pay off as much of the loan as you can. Since the car you have negative equity in has a value that isn't high enough to completely satisfy the financing balance, you'll have to chip in extra from your savings to fully pay off the loan.
Only do this if you absolutely need to get out from under the loan. If you can continue making your payments and the car is still working for you, there's no need to sell it just for the sake of selling it.
To keep the amount you have to spend out of pocket to a minimum, you’ll want to get the maximum amount for your sale as possible. That generally means you want to sell it yourself to another private party. You'll want to spend some time and effort in preparing the car for sale. Still, you don't want to perform any costly maintenance that doesn't add more value to the vehicle than you put into it.
Our guide to How to Sell Your Car is a great reference to study when you’re getting ready to sell. Here are a few steps you'll want to take:
Get Your Documents Together
Buyers won’t want to wait for you to get all of your past service paperwork and arrange for the car’s title to be released. Before you put your vehicle up for sale, gather all of the documents you have, including service paperwork and documentation that any damage was professionally repaired. Contact your lender, so you understand their process for getting your title, and you can quickly do so when you sell the car.
Most buyers will want a vehicle history report before they buy. If you purchase one yourself, you can show it to all prospective buyers and check it to make sure all of the information is accurate and complete.
Prepare Your Car To Be Sold
It's worth spending a weekend getting your car's appearance in tip-top shape before you advertise that it is for sale. You don’t have to go overboard, but giving the vehicle a thorough exterior wash, wax, and interior cleaning will make an excellent first impression with potential buyers. If it looks like you have taken care of your car, they'll typically be willing to pay more for it.
If there are minor repair or maintenance tasks that won’t cost you much money, go ahead and get them done. Just don’t perform any costly maintenance or replace the tires, as you won’t get the money you invest back from the sale.
Set the Right Price
While it would be lovely to get as much out of the car as it is worth, you need to price the vehicle realistically and be willing to accept somewhat less. Remember, the whole reason you're considered upside-down is the car’s loan balance is higher than its value.
There’s an art to setting the price of a used car. It has to be low enough to attract interest, but high enough that you have some room for negotiation below the asking price. The higher the price, the longer it will typically take to sell. The lower the price, the faster it will likely sell. If, however, you price it too low, shoppers will think something’s wrong with it. Too high, and you had better be able to tell shoppers why it’s worth so much. You can answer some of those pricing questions in your ad by saying things such as “needs brakes” or “new tires 1,000 miles ago.”
Advertise the Right Way in Free Places
Remember, you need to get as much cash out of your sale as possible. That means using free advertising, such as a Craigslist posting, to sell your car. Paying for ads in newspapers or other sites costs money you could otherwise put toward your underwater loan.
An attention-getting ad needs a complete description of the car, including its standard features, optional features, mileage, and list of any extras to be included in the sale, such as custom wheels or bike racks. If you have done recent service or have just replaced the tires, include that information to let buyers know they won’t have those expenses. Include as many sharp, clear, and well-lit photos as you can. You want to include pictures of all sides of the car, but make sure your home address and license plates are not legible. Include the phrase “as-is” somewhere in the ad and include language such as “or best offer” or “firm” to signal buyers whether you are flexible on the price.
Many places restrict the parking of cars with “for sale” signs in the windows. Before parking on the street, a public lot, or a private parking lot, be sure to get permission. A parking ticket or tow bill can be expensive, and you want your money going toward paying off the car loan instead.
Show Your Car Safely
Never invite a potential buyer to your house to look at the car. Instead, meet them in a neutral location, such as a police department’s safe exchange zone or a shopping mall parking lot. Make sure it's an area covered by conspicuous video surveillance, as it tends to weed out scammers.
Many potential buyers will be evaluating you as much as the car. Dress nicely, but not over the top. Acting confident, prepared, and professional signals buyers that you won’t be a pushover during price negotiations.
Test Drives and Inspections
Any savvy and serious buyer will want to take a test drive and get a pre-purchase inspection done by an independent mechanic. Don't allow them to test drive alone, but protect yourself by sending a copy of their driver's license to a responsible friend before the ride starts. If you feel unsafe, outnumbered, or just have a bad feeling about the circumstances, postpone the test drive until you can bring a friend along.
Never allow someone who is test driving your car to operate in an unsafe manner. First, they could cause an accident with injuries. Second, if they wreck your car and it is totaled, you won't get enough from the insurance company to cover your loan, and that's why you're selling it in the first place.
With any used car purchase, a pre-sale inspection is a good idea. You should expect serious buyers to request one. You’ll need to make your vehicle available to a mechanic of their choosing. If you don’t, it’s a red flag to buyers, and they’ll likely walk away from the deal.
Negotiate to Get the Best Price
Negotiating the price of a car is a little bit art, a little bit of science. Your best tools are confidence and information that backs up the amount you want to charge. It's common for buyers to offer a low number to start, as it tends to shake your confidence in the price you're asking. You want to counter their offer with one that's just a little below the asking price, backed up with reasons why your car is worth what it is. Remember, once they offer a price, they can't go lower. Once you counter, you can't go higher.
If you can't come to an agreement with a potential buyer, feel free to get their contact information and walk away. Don't fret about the time you invested, as your only goal in selling is to get the highest value possible. If you get several low offers, you may have to reassess the value of your car and lower your expectations.
Completing the Paperwork and Getting Your Money
When you sell a car to another private party, you and the buyer need to complete all of the paperwork yourselves. That includes a bill of sale, transfer of title, any other paperwork your DMV and the buyer’s lender requires. You can download basic bill of sale forms online. Just make sure they state that the car is sold as-is and the sale is final with no warranty.
Never accept payment for a car by personal check or money order. Only accept a cashier's check if you can accompany the buyer to the bank and receive the check directly from the teller. Cashier's checks, once the gold standard of payments, are now relatively easy to forge. If you have no other choice but to accept one, make sure you verify its authenticity with the issuing bank (not your bank) before you transfer the car's title to the buyer. Accepting cash is generally the best way to get paid. Even with cash, you'll want to take precautions to ensure your safety and make sure the bills are authentic.
When the sale is complete, pay off as much of your loan as possible with the proceeds. You might need to take out a personal loan to pay off the negative balance, as you can’t keep the car loan. With no collateral (your car), the bank will likely call your remaining auto loan balance due. Be sure you remember to cancel your car insurance.
There are a couple of times that it’s advantageous to refinance your auto loan, to either reduce the amount you’re underwater or increase your rate of payback. If you have some cash, you can pay the amount you’re underwater and refinance your car with a loan that has a loan-to-value (LTV) ratio of 100% or better. With that level of LTV, a lender will likely give you favorable loan terms, including a competitive interest rate.
The other time you want to refinance your car loan is if you had bad credit when the loan began, and you have been making all of your payments on time and in full each month. If that's the case, your credit score may have improved enough that you'll qualify for a loan with a lower interest rate. With a lower rate, you can pay down the loan principal faster and move beyond negative equity.
While many lenders can refinance auto loans, if you have significant negative equity or credit problems, it’s a good idea to shop for financing at smaller lenders. They're more likely to have the flexibility to listen to your story and customize loan options to fit your circumstances.
There's one more thing to remember about borrowing on a car with negative equity. Since lenders use the vehicle as collateral, any financing that is greater than the value of the car is essentially an unsecured loan. It will come with a higher interest rate due to increased lending risk.
You only want to refinance if it will reduce the interest rate or the length of the loan. Never refinance to lengthen the loan, as doing so will keep you underwater longer, and you’ll pay much more interest over the course of the loan.
Read our guide to auto loan refinancing to learn more.
Get the Car Loan That's Right for You
Apply for financing today, and get up to four offers. Compare your options before visiting the dealership to make sure you get the best rate for you. It's free, quick, and easy.
This next method is a bit tougher. You have to find a car with a massive cash rebate. It not only has to cover the negative equity on your current loan, but also the amount of value your new car loses the moment you drive it off the dealer lot. You can find the best new vehicle purchase incentives on our new car deals page.
Here's an example of how this might work. We'll say you owe $22,000 on a car that's only worth $20,000. That means you're $2,000 underwater on your current car loan. Next, let's say you've found a new $30,000 car with a $5,000 rebate, so you need to take out a loan for $25,000. When you purchase the new car, the dealer will pay off the $22,000 you owe on your old vehicle by applying its trade-in value and add $2,000 to the new loan. That takes care of the negative equity, making the new loan balance $27,000.
So, now you have a new car worth $30,000 and a $27,000 car loan, meaning you have $3,000 in positive equity, right? Well, not exactly, because the second you leave the car lot, the value of the car drops significantly. You probably have a $27,000 car with a $27,000 loan, though that’s better than having a car that’s $2,000 upside down.
In today’s job market, it’s not too hard to get a side hustle to get a little extra cash and pay down your car loan. It can be anything from driving for a ride-hailing company such as Uber or Lyft, delivering packages in your personal car for Amazon.com, freelance work, or a more traditional job for a few hours per week.
You have to be disciplined enough to put the cash toward your car debt, rather than spending it on other things that won’t help your financial fitness in the long-run. The nice thing about some side gigs is that you can jump in and out of the work as you need more cash.
Having a side job is also an excellent way to save up a substantial down payment for your next car. The larger the down payment, the less chance you'll have negative equity on the loan.
We’re now to the part of the list that includes methods you want to avoid if at all possible. At this point, you're in a place where you can easily dig yourself deeper into debt, put your credit rating at risk, and do long-term damage to your financial stability.
While you can use your current vehicle as a trade-in at a car dealership, you’re unlikely to get enough value out of it to completely pay off your existing car loan.
Car dealers have to incur costs refurbishing the cars they take in as trade-ins, cover the costs of purchase and sale paperwork, and make some profit. To cover these costs, they will generally give you a low trade-in value, which won’t come close to covering your negative equity.
To make matters worse, you won’t have money to put toward a down payment, so you can expect a high interest rate on your next loan.
If you find a dealer offering to pay off your trade-in, it’s important to understand what they’re really doing. Yes, they will pay off your current car loan, but only part of the money will come from your trade-in. They’ll get the rest by rolling the negative equity from your old car onto your new car loan. You’ll instantly have negative equity on your new loan. As the new car is likely to depreciate faster than you'll be able to pay down the balance, you'll only get deeper underwater during the first couple of years of the loan.
While a salesperson may tell you that it's no big deal, rolling the balance of your current car loan is a financial disaster waiting to happen. If the vehicle is stolen or declared a total loss, you can find yourself thousands of dollars or more in the hole. In the worst-case scenario, this irresponsible financial decision can lead to bankruptcy.
There are a couple of ways to get out of an upside-down auto loan that will work out fine if everything in your life goes perfectly. The problem comes if you have any hiccups in your financial life. One of these methods put you at risk of high interest rate debt, while the other puts your home at risk.
Some financial experts suggest getting a credit card with a zero percent introductory offer and using the card to pay off your negative equity. They recommend you then pay off the credit card before the introductory rate expires. Once your car loan is into positive equity territory, you refinance your loan with a lower rate or shorter term.
There are a few problems with this approach. First, most introductory offers only allow zero percent interest on purchases, not the cash advance you would need to pay down your auto loan. Cash advances on credit cards typically have rather high interest rates, as they’re unsecured debt.
If you can find an introductory deal that covers cash advances, the interest rate will jump to a high rate once the introductory period ends. Unfortunately, if you don't get the card paid off on time, you're saddled with expensive new debt. Replacing low-interest rate car payments with high interest rate credit card debt is a lousy way to get out from under an upside-down car loan.
Home Equity Loans/Home Equity Lines of Credit
Using a home equity loan or home equity line of credit (HELOC) is another risky way of getting out of an upside-down car loan. When you take out a HELOC, you're borrowing against your house to pay for your car. The interest rates are low because your home is used as collateral. You're literally risking the roof over your head to pay for your vehicle. If you think that sounds like a horrible plan, you're right.
Of course, if everything in your life goes perfectly, you’ll be able to pay off both your car loan and the home equity debt. It’s when life events get in the way that you’re in financial jeopardy. If things go terribly, you can lose both your car and home.
The last thing you want to have happen when you have negative equity is to have your vehicle repossessed. If you can't possibly make your car payments, you're much better off selling your vehicle for the highest price you can get. Then paying off the majority of the loan.
When your car is repossessed, you cannot expect the bank to auction it for anywhere near its highest possible market value. Plus, they'll have to pay the repossession company that tracks down and reclaims your vehicle. That cost is added to your loan balance. The lender is likely to sue you for the total unpaid debt.
Some debtors think it's a great idea to play hide and seek with their car to prevent the repossession company from finding and taking it. It's a horrible plan, however, as the repo company will bill the lender for all of the hours they have to spend chasing it down. That bill is added to your loan balance, so you only cost yourself money by playing games. A better idea (but still not a good option) is a voluntary repossession, where you take your car directly to the lender and hand over your keys.
The COVID-19 pandemic has changed the automotive marketplace overnight. Your car may not be worth what it was a week ago, you may have suffered a job loss, and you may not be able to sell your car easily. On the flip side, you may have more money you can spend getting your car loan above water.
Car Values Have Changed
The used car market operates on supply and demand. With the outbreak, job losses, and social distancing norms, there are likely far fewer used car buyers in the marketplace. Fewer buyers means less demand and declining used car values. Remember, the value of your car is the price you can sell it for today.
Values have dropped but consumer loan balances have not. Car owners who were well above-water two weeks ago may now be hundreds or thousands of dollars underwater. Owners who were just a little underwater then, are now likely much further upside-down.
You’re More Likely to Miss Payments
The outbreak is disrupting the U.S. job market, with tens of thousands of Americans facing unemployment or reduced hours. When you lose your income, it’s harder to make your car payments. If it gets so bad that the bank repossesses your car, they can still come after you for the difference between what you owe and what they can sell it for. That number is now likely larger.
Many lenders have programs to defer payments until the worst of the pandemic subsides. If you think you might miss a payment, you should communicate with your bank, credit union, or other lender to take advantage of whatever programs they’re offering. It’s important to note, however, the interest will keep accruing on your loan, even if you’re allowed to skip a payment. You’ll likely come out of the other side of the crisis further underwater than you were before.
Our guide to what to do if you can’t make a payment due to the pandemic takes you through the steps you need to take immediately to protect your car and credit.
You May Not Be Able to Sell Your Car Easily
One of the best strategies to get out from under an upside-down car loan is to sell the car for the maximum amount you can, and pay off as much of the loan as you can. With social distancing and strict shelter-in-place orders in place across a growing swath of the country, being able to sell a car may be difficult or impossible. Until the crisis is over, you’ll likely have to use online tools to sell, and be willing to make concessions to uneasy buyers. You may have to let them test drive your car solo, which is not something you normally want to do.
Opportunities to Get Into Positive Equity Territory
If you’re in a job that’s not at risk, you have plenty of money in your family’s emergency fund, and you qualify to receive the stimulus checks the federal government is considering, the time you spend at home may free up some cash to get your car loan above water.
Consider taking the money you have budgeted for spring travel, sporting events, or concerts, and diverting it to your car loan. Every dollar you put toward your loan gets you closer to positive equity territory. It’s also a dollar you’re not paying interest on. The Federal Reserve’s interest rate cuts will probably significantly reduce the amount you would make if you put the money in savings, making paying off higher interest rate car debt a more attractive alternative.
More Shopping Tools From U.S. News & World Report
One reason borrowers fall into the trap of an upside-down car loan is they didn’t buy the right car in the first place. Our new car rankings and reviews and used car rankings and reviews are designed to help you find a vehicle that meets both your needs and your budget.
You can also fall into the trap of negative equity if you overpay for your car or are talked into financing costly add-ons. The U.S. News Best Price Program connects buyers and lease customers with local dealers offering pre-negotiated prices. Buyers save an average of more than $3,000 when they use the program.
Another excellent way to avoid overpaying on a car, truck, or SUV is to get a great deal upfront. Our new car deals and used car deals pages track the best incentives automakers are offering on both new and certified pre-owned vehicles.
The U.S. News car insurance hub can help you save money on your auto insurance by helping you find the coverage you need, the cheapest insurance company in your state, and discounts you qualify to receive. When you save money on insurance, you’ll have more to spend chipping away at the balance of your upside-down car loan.