Upside-down Car Loan Keeping You Underwater?

Here are your options:

You probably do not realize it when meeting with a car or truck dealer finance department, but vehicle loans can play a particularly painful role in your financial life when it comes to missing payments or experiencing financial hardships. While mortgage lenders, student loan companies, many business lenders, and even most credit card companies can offer some form of financial hardship relief through government programs or through their own in-house services, you will not find much in the way of government or creditor support when you start missing car or truck payments.

What options do you have when you can no longer afford to make your monthly vehicle loan payment?

When you face financial hardships that may lead you to miss an upcoming car or truck payment, you need to determine if you have equity in the vehicle, if you can afford to keep the vehicle, if you must sell it, or seek alternative options to address your upcoming financial crisis.

Perhaps the biggest mistake you could make would include doing nothing but hoping everything will work out. Hope plays a critical role in our emotional well-being, but hope doesn’t pay the bills.

Determine If You Are Upside-down With Your Car Loan

Your first step to deciding what options you have when it comes to your vehicle involves figuring out whether you have equity in the vehicle (owe less than its value) or are upside-down (owe more than the vehicle’s value). To find out if you owe more on your vehicle than its value, start by checking your current loan value with your lender. You can usually find this on your lender’s phone app or your most recent account statement.

Next, visit either the National Automobile Dealers Association page or Kelley Blue Book to determine your vehicle’s current value. For this article, assume that you would sell your vehicle to a private party, meaning its value will likely lay roughly halfway between the vehicle’s “Retail” value and its “Trade-in” value.

Finally, subtract your loan balance from the vehicle’s value. If this formula results in a negative number, you have an upside-down loan.

Coming to Terms

Once you confirm the upside-down status of your car loan, you need to quickly come to terms with that reality. To put it bluntly, in most cases, you have likely borrowed more than you can repay.

If you refuse to accept this reality or ignore its place in your financial life, you will likely look to place blame on someone else and then look in vain for that person to bail you out of your difficult situation. Recognize this unfortunate truth: No one else will come to your rescue. No nonprofits exist to help people who got into a car or truck loan they can no longer afford to pay. Unless you have a family member or fairy godmother willing to pay down your debt, you will need to act on your own behalf. This will try both your patience and your capabilities, but you can do this.

Consequences of Doing Nothing

Far too many consumers will do nothing but hope some miracle will occur and they will suddenly have enough money to make their next payment. Such inaction leads instead of several possibly serious consequences.

If the vehicle ends up in repossession, the borrower might incorrectly believe they have no further financial responsibilities. Such erroneous thinking misses the fact that the financing company can – and usually will – clean the vehicle, re-register it, store it, transport it to auction, and sell it at an auction. The financing company will incur charges for each of these steps. If the company does not recoup at auction the amount of the loan due plus the newly-incurred fees, it will send a new bill to the former buyer. Quite often, this new bill can amount to more than the loan balance just before repossession. This bill will list expenses such as repossession fees, towing fees, registration fees, storage fees, cleaning fees, transportation fees, auction fees, and more.

Additionally, both repossessions and voluntary surrenders will have strongly negative effects on your credit rating for years into the future. Poor credit means you will not likely qualify for reasonable repayment terms in the near future. Voluntary surrender may not hurt as much as a repossession, but it will still hurt.

Finally, when threatened with a potential repossession, many borrowers turn to bankruptcy to protect their vehicle. In some cases, they can successfully save their vehicle from the repo man. However, in many cases, even after including a vehicle repayment in a Chapter 13 bankruptcy plan, a large percentage of consumers will again find themselves unable to afford the monthly payment, leading to losing the vehicle.

Most Common Reaction

Most car buyers understand that they will have an upside-down loan for at least the first half of their loan repayment period. Vehicles depreciate much faster initially than the borrower can pay. An upside-down loan only really concerns the borrower when he or she begins to struggle with the monthly payments.

For most people in this situation, the next step should involve contacting the lender to ask about hardship repayment plans. Many lenders will offer their customers one month without a payment due if the borrower has a good history of on-time payments.

Unfortunately, many vehicle owners next attempt to sell their car or truck with frantic listing titles that might include something like, “MUST SELL – TAKE OVER PAYMENTS.” Lenders, however, do not allow anyone else to “take over payments.” Instead, they will require a new loan application, which will not only turn off most potential buyers but will also kill the deal for most lenders. Most lenders will not approve a loan for more than the value of the vehicle.

If the value of your vehicle nearly equals your loan, you might take a few steps to increase the value of the car or truck without spending much out of pocket. These could include one or more of the following:

• Giving the vehicle a good washing and detailing before listing it for sale with multiple photos

• Shining up the wheels and scrubbing the tires so they look black instead of road brown

• Polishing your headlights (try the hack of using toothpaste – the polish lasts a week or two)

• Buying touch-up paint for noticeable scratches

• Cleaning or replacing floor mats

• Topping off the fluids to get rid of any related warning lights

• Fixing noticeable dents

• Adding hubcaps or wheel coverings if missing

Additionally, rather than trading it in, consider selling it to a private party (another person rather than to a dealership). Trading in your vehicle means you will get up to 30% less for it than if you sold it directly. It will require more time and several inconveniences, but the difference can amount to thousands of dollars.

Options for Keeping Your Vehicle

If you foresee troubles with making an upcoming car or truck payment but still want to keep the vehicle out of repossession, you have a few options to consider, now of which guarantee you success.

Cutting Expenses

Many households will turn to extreme expense-cutting measures. In order to afford the next vehicle payment, they might cut down on groceries, dining out, or entertainment expenses. Such an option can serve to help the borrower re-prioritize his or her expenses.

Shuffling Payments

A less helpful situation involves shuffling debt payments. Rather than paying a credit card, medical debt or store account payment, the consumer will use that money to make the car or truck payment. Unfortunately, this short-term decision will have long-term negative consequences, likely leading to higher interest rates on current accounts, a poor credit rating and higher payments and future loans, and possibly even collection calls and notifications.

Consolidate Payments

Consider your personal finances as a whole and decide if you might consolidate other debts through a nonprofit credit counseling agency like Money Fit, meaning you will have a single, lower monthly payment. Consolidating your credit cards, store cards, collections, and medical debts might free up enough cash in your budget to allow you to make your current and future car payments on time.

Use Savings Strategically

Most households will not have enough savings to pay off the vehicle. Others will refuse to use their emergency savings funds for anything except life or death situations. Somewhere in between, households might use a portion of their savings (non-retirement) to either make the upcoming monthly payment or pay down the loan balance in order to sell the car. Do not use retirement account funds since doing so will lead to penalty fees and taxes that will make your financial situation worse.

Refinance

For vehicles not upside-down, you might consider reaching out to your current lender or another lender about refinancing the loan. Essentially, the new loan pays off the old loan, usually extending the payments for another one to three years but typically lowering the amount due each month. Avoid refinancing at a higher interest rate, since this will mean paying more over time. Avoid the temptation to focus on the lowest monthly payment available and instead find a loan with the lowest interest rate and a payment you can afford.

Side Hustles

When time and physical health permit, you might consider taking on extra work or pursuing a side hustle. Whether you look into food delivery, ride-sharing, opening your home to Air B&B customers, walking dogs, or taking on a neighbor’s yard work, the extra income might amount to enough to get you through a difficult financial spot and afford your monthly vehicle payment.

Have a Sale

Using a yard or garage sale to come up with additional cash to cover the next vehicle loan payment comes with a cost. Anything you sell typically brings in just 5% to 25% of its original cost, meaning you lose money on every sale. This will especially matter if you sell an item you will have to repurchase later at the normal price.

Take on More Debt

A highly dangerous step to take involves taking on additional debt. Whether heading to a payday loan service, a corner finance company, or looking into social lender services online (e.g. Prosper, Lending Club), borrowing more money to pay a current debt will almost certainly lead to greater troubles in the future. If you can’t afford your current payment, what makes you think you will afford future payments that add yet another debt payment to your household?

Options for Keeping Some Form of Transportation

You will find many options at dealerships near you that seem like answers to your situation but that could make things worse if you act impulsively.

Rolling Your Current Loan into a New Car Loan

You will no doubt find used car dealerships in your area that will offer to “roll” your current loan into a loan for another vehicle. Do everything you can to avoid such offers since they will immediately put you even further in debt and upside-down.

New Vehicle Cash Rebates

Some new car dealerships might offer cash rebates on a new vehicle that you might consider using to pay off or down your current loan. However, a new car loan puts you further in debt and extends your indebtedness for an additional few years.

Trading Down

Your less-damaging option might include “trading down” for a less-costly vehicle than your current car or truck. Doing so may save you money over time, even if it goes against the human tendency to desperately hang onto what we consider superior items or situations. An example of such a difficult choice would involve trading in a late-model truck or SUV for an older sedan.

Leasing

Some vehicle owners might think that trading in their car or truck for a vehicle lease contract will save them money over time. On the contrary, leasing a vehicle will inevitably cost you more over time than purchasing a vehicle. Although you would no longer have an upside-down loan, you should expect some high lease contract fees as well as limitations on your vehicle usage (mileage).

Prevention

Preventing troubles with car and truck loans will always trump fixing those troubles, no matter how creative they seem.

Patience, Persistence, and Endurance

The most financially-beneficial choice you can make involves hanging onto your vehicle as long as you don’t need to put your mechanic on speed dial. Compared to replacing your new vehicle every five years or so, you could spend one-fifth the amount over your lifetime for transportation if you would purchase used (3-5 years old) instead of brand new and hand onto it for five years after paying off your loan. In terms of today’s dollars, that turns out to amount to over $300,000.

Make Extra Payments

When purchasing your next vehicle, make the largest down payment you can. Do not accept large car payments as “the norm.” The larger your down payment, the lower your monthly payment, the less interest you pay over time, and the sooner you can pay off your loan.

Additionally, whenever you can, make larger payments than the lender requires. Accelerating your loan repayment through larger payments lowers the total amount of money you pay out over the period of the loan.

Shorter Loans

If you can make larger monthly payments over the long-term, consider taking out a two- or three-year loan rather than a five-, six-, or seven-year loan. The shorter the loan term, the less it will cost you in interest in total.

More Affordable Vehicle

You can lower your future monthly payments in several ways. First, of course, you can choose a more affordable vehicle. New vehicles will cost more than used vehicles. Most vehicles produced after the Great Recession should last between 150,000 and 200,000 miles. Consequently, the average vehicle owner who drives their car or truck 12,000 miles a year can expect a new car to last 12 to 17 years before requiring any major repairs.

Another way to make your vehicle more affordable involves choosing the standard make or model with all the options rather than a luxury model. Or, consider skipping the optional packages that come with extras you will never use but end up paying for over the life of your loan.

Related Questions

Can you give your car back to your finance company? Voluntarily surrendering your vehicle to your finance company does not necessarily protect you from additional fees and charges, such as transfer fees, storage fees, cleaning fees, transportation fees, auction fees, and more. Before surrendering your vehicle, get in writing what, if anything, the lender will charge you.

Can a family member or friend take over your car payments? Ads, posts, and individuals that request you take over vehicle payments misrepresent reality. A lender will require you to apply for a new loan with new monthly payments. Never agree to make payments on someone else’s loan without transferring the title to your name.

How much is too much for a car payment? If you have a car payment but you don’t contribute to your savings, your car payment is likely too high. You should keep your total automobile expenses (payment, insurance, gasoline, maintenance) under 10% of your monthly net income. The lower the better.