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World Car Nissan
Upside Down Car Loan? Here are some options
We’ve all been there. You wake up and decide you want to trade in your old car for a new one with the latest technology. You do your research, go to the dealership and prepare to drive off into the sunset only to be told the trade-in value of your vehicle is only a fraction of what you still owe on it. This is called negative equity and it is a common affliction in America today. If you find yourself in this situation, don’t panic --you are not alone! As of 2017, 32.5% of all vehicles that were traded-in had negative equity and the number has likely grown in the last three years. Here are some options for you to explore if you’re upside down on your loan.
This is the most obvious option. If you find out you’re under water on your loan, take a deep breath and pat yourself on the back – knowing is half the battle. As soon as you see what is owed on the car, how long you have left on your loan and learn your trade-in value, you can work toward making your negative equity turn into positive equity. Where negative equity is the difference between the value of your car and what you owe on it, positive equity is only what is owed on the vehicle. Your loan payment is designed to pay off the full loan amount in the allotted time assuming every payment is made for the full term of the loan. You can achieve positive equity by making larger payments each month. A large portion of payments go toward the interest on the loan as opposed to the principle balance. If you are able to make larger payments each month, the interest will be paid off quickly and you will begin to pay off the principal value. This will help pay off the loan quicker which helps prevent going upside down on the loan in the first place as well as helping you get back into the green faster.
This option is the safest. It doesn’t put you in a worse position than you were in before. This can also be beneficial for building credit. You’ve already structured your finances with your current vehicle payment in mind and you won’t have to worry about losing anything in the interim. This can also help you plan ahead and be ready when you do decide to get a new vehicle.
If you really hate your vehicle, you can always sell it privately. The Facebook marketplace and Craigslist are full of people trying to sell any and all kinds of vehicles. Generally, private sellers can get more for a vehicle than a dealership is willing to pay. This is because the dealership has to clean the vehicle up and re-sell it for a profit. If your vehicle is valued between $6,800 and $11,000, the dealership will want to give you the lowest price they can so they can make a profit when they re-sell the vehicle. If you sell privately, there is no guarantee you’ll be able to get what you’re asking for the car, but you can set your own price instead of waiting for an offer. The danger with this route is that you are still responsible for whatever you still owe on the vehicle. If you’re upside-down on your auto loan, you aren’t going to be able to sell the car for what you owe. If, for instance, your loan payoff is $14,357 and you sell the car for $9,000, you are still responsible for the remaining $5,357 on the loan. You can either pay that out of pocket (which is unlikely – if you had that money just lying around chances are you would have paid it on the loan to begin with) OR you have to continue making payments until the full amount is paid.
This option also leaves you without a car. If you don’t have another vehicle handy, then privately selling your vehicle with no profit margin to use as a down payment on a new vehicle is very unwise. If you want to be rid of your vehicle but will need a new vehicle to replace it within quick succession, it is more advisable to continue making your payments to lower your overall loan amount OR go to a dealership and try to trade in the vehicle.
As mentioned above, a dealership will never offer a trade-in value anywhere near what you can get as a private seller. If you don’t care so much about this and just want to be rid of the vehicle and the loan, this option may be best for you. You, more than likely, won’t walk away with a lower monthly payment, so if that is something you’re looking for; this is not your ideal choice. The trick to this method is choosing a new vehicle with discounts, rebates and incentives. This rarely, if ever, works on a used vehicle. Used cars don’t come with any rebates, incentives or discounts from the manufacturer or the dealership. These discounts and rebates are crucial as the dealership uses them to take care of whatever excess loan amount becomes tied up in your new loan. For example, let’s say your payoff is $14,357. The dealership offers you $8,460. This means you owe a remaining balance of $5,897 on your current loan. You can choose to pay that out of pocket (unlikely) or, you can choose to carry it over into the new loan on your new vehicle. Let’s say you find a new 2020 Nissan Sentra for $20,420. The vehicle comes with the World Car discount of $819, the Nissan Customer Cash discount of $1,000 and you happen to qualify for the NMAC APR CASH, the Military Discount and the New Graduate Discount which totals $1,750. Now, combined with the other discounts, you have a total of $3,569 in discounts. This amount gets applied to the added $5,897 – not the car price of $20,420. The remaining $2,328 from your previous loan gets added to the new vehicle total, making the total new loan finance come to $22,748. The new loan will, inevitably, be more than what you owed on your previous vehicle and, in some cases, may be more than what you paid for your old vehicle. This means that the loan payment could very well be higher or on par with whatever you were paying before you got rid of your old vehicle. This isn’t a bad option, by any means, but you need to make sure you know what you owe and where you need to end up before you sign the paperwork. You don’t want to end up in the same situation a few years down the road because you didn’t read the fine print and make an informed decision. If you choose to go this route, you will want to look for dealer rebates that fit within the parameters of what you’ll owe on your old vehicle. End of the year sales are great for this as most dealerships are trying to push out their previous year models in favor of new models. Be sure you know what you can afford and share that information with your salesman so they can help you find the best deal.
Another viable option is to refinance your loan for a lower interest rate and payment. There are lenders for all manner of credit, but ideally, you will want moderate to good credit to refinance with maximum benefit (that is around the low to high 600’s. The closer to 700+ you are the better!). They will look at your current loan, your financial situation and your credit score. Making your payments on time and having a low debt-to-income-ratio will make it easier to qualify for a new loan with a lower interest rate. If your credit is shaky, you can choose to add a co-signer to your new auto loan. This individual should have a good credit score around 700+ in order to qualify. The lender will also check the co-signers’ debt-to-income-ratio and credit score. This is a good option if you are able to find a lender that can offer you a good loan with a reasonable interest rate. This requires some shopping around, but sites like Credit Karma make it somewhat easy by showing lenders and approval odds based on your personal credit and D-T-I-R. If you know you want to refinance in the near future, be sure to pay off whatever debts you can to try and boost your score as high as possible before you submit the loan paperwork. Your credit score is updated roughly every 45 days. A general rule of thumb is to expect a debt to disappear from your credit score or a significant payment to show up the month after you pay it. Your credit score and your D-T-I-R are important! Knowing where you stand financially can help you make better decisions, especially when it comes to large purchases like homes and vehicles.
The truth is, it is hard to stay in love with your older vehicle. We live in a fast-paced, consumerist world where the latest and greatest is always desired. In reality, most of us can’t afford to keep up with the Jones’s, especially not in the vehicle market. If you find yourself upside-down on a car loan, take a deep breath and remember that millions of Americans are in the same boat. Realize that you do have options and be sure to make practical and informed decisions before jumping onto the newest vehicle fad. Take your time, build your credit, do your research and when you’re ready to find your dream car, come visit us here at World Car Nissan!
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