Is the balance on your auto loan more than your vehicle’s resale or trade-in value? Welcome to “The Upside Down,” a place where millions of people reside each year. Unfortunately, being underwater on your car loan can be quite a stressful situation to be in. However, with some patience and guidance from a trusted expert, and after making a few difficult decisions, your bad car loan can be put in the rearview mirror—or prevented altogether.
Stop yourself from drowning in bad auto financing debt today! Here are some of the industry’s biggest secrets about upside-down car loans.
Get Gap Insurance Coverage
Either before you acquire your loan or after you’re upside down, you should consider adding Guaranteed Auto Protection (GAP) coverage to your insurance policy. GAP insurance covers the remaining balance on your car loan if your vehicle’s resale value is too low.
Make A Bigger Down Payment
It’s common knowledge that a vehicle can lose over 20% of its value in just one year. Stay ahead of the dreaded depreciation curve by paying down a significant amount of the car’s sale value. You can do this with flat-out cash, trading in a high-value vehicle, or taking advantage of available dealer-exclusive car specials or automaker cash-back offers. (Check our Honda deals in South Florida, for instance.)
Opt for Short-Term Car Loans
Stretching out your auto financing term can reduce your monthly payments, but doing so also increases your risk of going underwater on the car loan. Common 72- and 84-month auto loans are more likely to result in negative equity due to depreciation. If you plan on purchasing a new car, it may be in your best interest to go with 60- or even 48-month auto financing in order to avoid those extra years of depreciated value.
And if you do choose a longer-term car loan, be sure to make a significant down payment to reduce the likelihood of coming out underwater.
Be Careful Of Add-Ons
Financing a car is one thing; financing OEM car accessories or add-ons is another. A general rule of thumb if you’re concerned about being upside down on a car loan: Only pay for items that increase the resale value of your vehicle. Over the course of a 6-year loan, a $100 add-on can balloon to a $500 add-on once you factor in interest—and that extra cost won’t be made back when it’s time to sell.
If you simply must have the latest and greatest tech, experts advise you to pay cash for those add-ons rather than tie the cost into your loan.
Ride It Out Until You Have Positive Equity
The best way to get out from underneath an upside-down vehicle loan is to continue making your monthly payments. If you aren’t restricted by prepayment penalties, consider overpaying each month. Continuing with your payments will keep your credit intact, as well.
If you take this popular route, it’s important to notify your lender that you’re applying any extra payment toward the principal on your loan, not the interest accrued.
Pull Off The Band-Aid & Sell The Car
Of course, selling your vehicle is oftentimes the most logical option, even if you’re upside down on a loan. You won’t have enough to cover the underwater loan balance, so you’ll need to come up with cash to pay it off. However, choosing to sell early can prevent headaches from turning into migraines down the line.
Another common albeit stressful option is to sell your car outright and take out another small loan for the unpaid balance. This may lower your monthly payments and even your interest rate, depending on circumstance. (A vehicle repossession is likely in this scenario, though it’s not always the case.)
Negotiate With Your Lender
If you are unable to pay a lump sum to cover the debt left on your bad car loan, it’s time to speak with your lender. Payment arrangements are sometimes available to those who need help getting right-side up on their upside-down auto loans.
For instance, you may be able to make extra monthly payments to cover the loan’s principal at a rate that paces with your car’s estimated depreciation value. This special amortization process will allow you to get out of your bad car loan quicker.
Refinance Your Bad Car Loan
Refinancing is another popular way to make an upside-down car loan disappear. If the interest rate on your original loan is high—whether that’s because you took out a long-term loan or financed a bad-credit loan—this option may help reduce it.
To ensure your refinanced car loan won’t also go underwater, make good choices from the beginning. Only refinance if you’re able to lower your interest rate or shorten the term lengths. Choose credit unions and local community banks as they are more open to refinancing negative-equity auto loans.
Trade Your Car Into A Dealership
Effectively, trading in your car at a dealer rolls that upside-down auto loan into a new financing contract. You may take on additional debt, but if the newer vehicle has a higher resale value, you may end up with positive equity. Smart buyers in these situations will look for new cars with cash-back rebates that can limit their exposure to a second bad car loan. Even smarter buyers will finance a used car or certified pre-owned Honda.
Also, be wary of any dealers who will pay off your old underwater car loan; they may add that negative equity into your new loan, pushing you even further into the weeds.
Need Help? Our Honda Dealerships Are Here For You!
Representing all of South Florida, our Honda dealerships are always available to help you make the best Honda financing decision. All of our South Florida car dealerships accept trade-ins and can assist you in finding the ideal auto loan with low-APR financing. Just request a quote online or head to a South Florida Honda Dealers location near you to get started.