Being upside down on a car loan means you owe more on the loan than your car is worth. Selling your car or paying off the loan early are the two main ways to get out of an upside-down car loan. Trading in your car, refinancing the loan, or surrendering your car will not help you get out of an upside-down car loan.
To get out of an upside-down car loan, consider making extra payments, refinancing or selling the vehicle. To avoid being upside down on your loan in the first place, shop around for good rates and try a larger down payment or a shorter repayment term.
Oftentimes, the dealership will finance the negative equity into your new loan. This decision can cost you even more when you consider the interest charges on the additional amount financed and the fact it will contribute to you being underwater on your new car too!
Returning your car to the lender before you are finished paying it off is called a voluntary surrender or voluntary repossession. In terms of your credit, a voluntary surrender is considered derogatory and will have a substantially negative impact on your scores, so it should be a last resort.
Voluntary car repossession is only a slightly better option than involuntary repossession. You may be a bit more prepared and have some control over when you surrender your car if it's voluntary. Avoiding some of the extra fees that can come with involuntary repossession can be helpful, too.
What Happens if I Voluntarily Surrender My Car? If you voluntarily surrender your car, you can avoid some of the extra costs associated with repossession, such as towing and storage fees. But you'll still be responsible for paying the deficiency balance if the car is sold for less than the amount you owe on the loan.
One way to get out of a car loan is to sell the vehicle privately. If you're not upside down on the loan, meaning the car is more valuable than what you currently owe on it, you can use the proceeds of the sale to pay off the current loan in full. Another term for an upside-down car loan is negative equity.
You still owe $18,000 on your car loan. That means you have $3,000 in negative equity. To trade in your car, you have to pay that $3,000. Some dealers will promise to pay the $3,000 off themselves — but they'll really pass the cost on to you.
Refinancing the loan or selling the vehicle are two of the most commonly used ways to deal with negative equity. You may also consider trading in your vehicle for a different car, though that can lead to additional auto loan debt if you're rolling the original loan balance over.
If you're interested in trading in your upside-down car, some dealerships will offer to pay off the loan for you. Sounds too good to be true? It's because it is. While the dealer will pay for this loan upfront, this balance will get added to the loan of the new vehicle.
Can you return a new car if there's something wrong with it? Yes — most states have lemon laws to protect consumers if their newly purchased car has unforeseen mechanical issues. You may also be able to return a vehicle if your lender didn't approve a loan or the salesperson was dishonest.
How Much Negative Equity Is Too Much on a Car? The maximum negative equity that can be transferred to your new car is around 125% . It means your loan value should not be more than 125% of your car's actual worth. If it is more than 125% then your next car's loan would not be approved.
Does GAP insurance cover negative equity? Yes. Negative equity (aka an upside-down loan) is another term for the gap between what you owe on your auto loan and the car's actual value. GAP insurance covers the difference between the two.
A lawyer likely can't help you, but the bank may be able to. Contact the bank you financed through, and tell them what happened, see if they can assist.
A repossession stays on your credit report for seven years, starting from the first missed debt payment that led to the repossession. In the credit world, a repo is considered a derogatory mark.
Trading in your old vehicle, if you have one, could help lower the amount you need to finance with a zero down payment car loan. The trade-in value of your old car essentially works to lower your financed amount in much the same way as a down payment would, without any upfront cash required from you.
Losing your car can hurt your credit quite a bit unfortunately. Having your car repossessed or surrendering it voluntarily is seen as a major negative event by lenders. They'll view you as high-risk. Expect your credit score to take a big hit, maybe over 100 points or more.
Note: If you're selling a car with an active loan, you're still the one responsible for paying it off, so the remaining balance on the loan will likely be subtracted from the price the dealer offers you. So if you owe more than what the dealer offers, you'll need to pay the difference to the lienholder.
If your lender can't locate your vehicle to do a "self-help" repossession, they can still sue you for the vehicle. This will involve a small claims case, where the judge will order you to give the car to the lender. You might even be compelled to Court to provide testimony about the location of the vehicle.
Another option is to give up the vehicle to the lender voluntarily rather than going through the repossession process. The lender may find this option appealing because it avoids the costs of repossession, and it may agree to reduce or eliminate the deficiency balance on the loan.
If you can't make your car payments, there are some clear advantages to voluntary surrender compared with involuntary repossession: You can avoid some of the penalties and fees imposed during an involuntary surrender, like towing and storage fees.
Trying to reinstate or redeem your auto loan typically has to happen within a short time period, such as about two weeks, so you could have your car back soon after it's repossessed. You may have to wait longer, perhaps several months, if the car is sold at auction due to the time of the auction process.