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With the unemployment rate sitting close to 10% and auto dealers having a history of providing car loans to unqualified applicants, more consumers are finding themselves upside down in the car loans.

Being upside down on an auto loan, or owing more on the loan than the value of car can be detrimental to your finances and occurs frequently because cars start to lose their value as soon as they leave the lot.  

“A car is never an investment,” says Philip Reed, senior consumer advice editor for “It’s always going to depreciate.”

Upside Down? What You Need to Know

If you are upside down and want to trade in your old car for a new one, your negative equity doesn’t magically disappear-it follows you to your next vehicle.

Curious how long it will take you to pay off your loan? Use this tool

“You can include the negative equity in the next loan or lease, but that’s not something that is recommended,” says Eric Hoffman, spokesman for Americans Well-Informed on Automobile Retailing Economics [AWARE].  “You’re basically borrowing money to pay off borrowed money.”

It’s important to understand the financial implications of tacking on your old debt to your new payments.

“Increasingly, there are more consumer laws that require disclosure [with adding negative equity],” says Reed. “However, it’s a very intense experience and one that people are very unfamiliar with and don’t go through very often. They need to know as much as they can and be their own advocate in the dealership.”

Fortunately, your credit won’t be damaged with an upside down loan or lease if you make your payments consistently and on time. On the other hand, if you don’t pay regularly, you could have your car repossessed. “If someone stops paying and it goes into default, it will be reported and that can affect your credit,” explains Hoffman.

What to Do When Treading Water

With an upside down car situation, Reed recommends to stick it out with the car you have and keep up with your payments.  “[If you] stay in the vehicle, over a year or two you’ll be able to pay more and more of the principal and catch up,” he says. “By the time you’re done paying off the loan, you’ll probably have some equity in the vehicle.”

But if your finances are stretched and you cant afford the car and payments-getting rid of the car might be your best option.

Assuming your car is in good condition, try and sell the car on your own.

“If you sell a car to a private party, you will get more money than you would at the trade-in value,” says Oren Weintraub, president of Authority Auto.  “Or you can advertise on some of these auto web sites and see if you can get the best return that you can for your car.”

Depending on your bank’s regulations, a trusted person or family member can take the car off your hands. “You have to work with your lender,” says Hoffman. “If you get their approval, you can transfer the obligation of the loan and the vehicle to a willing party.”

In the case of a lease (or loan), Weintraub cautions that your bank may require the original person to keep their name on the contract. “You don’t want to put your credit at risk,” he says.

However you choose get yourself right side up, you want to do it as soon as possible.

“The whole concept of being upside down, sometimes they call it being 'under water,' which is more descriptive and a little more graphic,” explains Reed. “It’s a terrible situation to be in.” 


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