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.
â€śA car is never an investment,â€ť says Philip Reed, senior consumer advice editor for Edmunds.com. â€śItâ€™s always going to depreciate.â€ť
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 doesnâ€™t magically disappear-it follows you to your next vehicle.
â€śYou can include the negative equity in the next loan or lease, but thatâ€™s not something that is recommended,â€ť says Eric Hoffman, spokesman for Americans Well-Informed on Automobile Retailing Economics [AWARE]. â€śYouâ€™re basically borrowing money to pay off borrowed money.â€ť
Itâ€™s important to understand the financial implications of tacking on your old debt to your new payments.
â€śIncreasingly, there are more consumer laws that require disclosure [with adding negative equity],â€ť says Reed. â€śHowever, itâ€™s a very intense experience and one that people are very unfamiliar with and donâ€™t go through very often. They need to know as much as they can and be their own advocate in the dealership.â€ť
Fortunately, your credit wonâ€™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 donâ€™t pay regularly, you could have your car repossessed. â€śIf someone stops paying and it goes into default, it will be reported and that can affect your credit,â€ť 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. â€ś[If you] stay in the vehicle, over a year or two youâ€™ll be able to pay more and more of the principal and catch up,â€ť he says. â€śBy the time youâ€™re done paying off the loan, youâ€™ll probably have some equity in the vehicle.â€ť
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.
â€śIf you sell a car to a private party, you will get more money than you would at the trade-in value,â€ť says Oren Weintraub, president of Authority Auto. â€śOr 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.â€ť
Depending on your bankâ€™s regulations, a trusted person or family member can take the car off your hands. â€śYou have to work with your lender,â€ť says Hoffman. â€śIf you get their approval, you can transfer the obligation of the loan and the vehicle to a willing party.â€ť
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. â€śYou donâ€™t want to put your credit at risk,â€ť he says.
However you choose get yourself right side up, you want to do it as soon as possible.
â€śThe whole concept of being upside down, sometimes they call it being 'under water,' which is more descriptive and a little more graphic,â€ť explains Reed. â€śItâ€™s a terrible situation to be in.â€ť
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