Suffering from an Upside-Down Car Loan? Butler Dealerships Tells You How to Recover

Whether from a car accident, financial hardship, or refinancing gone wrong, it is all too easy for car buyers to wind up with an upside-down car loan.

Suddenly, you’re swimming in a sea of debt and default car payments, struggling to get yourself out of negative equity. What can you do? How do you pull yourself out of this financial mess?

That said, Butler car dealerships, Precision Jeep gives you the ins and outs of upside-down car loans, from what it is to proactive steps you can take to decrease negative equity and get back in the green.

What exactly is an upside-down car loan? And how is it different from a standard loan?

Let’s say you recently purchased a new car and, thanks to persistent negotiation, you were able to talk down the sticker price to $25,000. After you drive off the lot, the vehicle’s value drops considerably.

After year one, without much wear and tear, your vehicle depreciates 20% from its original value (depreciation rates usually fall between 20%-30%).[1]

Because of depreciation, not to mention a T-bone car accident and low down payment, you end up owing more than what the car is worth: $20,000 on a now-$16,000-dollar car. In other words, you have an upside-down car loan.

Unlike regular car loans, an upside-down loan has negative equity—the difference between the amount owed and the value of the car—which (unfortunately) increases every time you’re unable to make a car payment. However, while uncomfortable, being upside down on a loan is not automatic financial doom.

The truth is, upside-down car loans are manageable, as long as you continue to make regular and frequent car payments.

It starts to get dangerous though when car buyers begin to default on not one but several monthly payments, increasing the negative equity gap.

4 Ways to Recover from an Upside-Down Car Loan

Whether or not you are regularly defaulting on car payments, it can feel stressful to be upside-down. To get yourself back on track and financially sound, here are several ways you can recover from negative equity.

#1. Pay Off the Original Loan

Keeping the car and paying off the original loan is the best way to recover from an upside-down loan. Consumers who go this route don’t need to worry about negative equity rolling into that new car loan and potentially pulling them into the upside-down cycle: upside-down loan, increase negative equity, refinance, repeat.

As Butler Dealerships says, the more car payments you frequently make, the shorter it will take to pay off the loan, which saves you interest and closes the negative equity gap. Once the loan is paid off, you can either sell your vehicle and take a check from the dealership. Or trade it in and have the money go toward your new auto loan.

#2. Refinancing the Original Loan: Take Advantage of Dealer Incentives

As Butler car dealerships mentioned, refinancing can be a risky move, potentially getting you stuck in a cycle of debt. Needless to say, not all refinancing is a no, especially if you take advantage of dealer incentives—like low-interest financing and rebates, which can cut down your negative equity.[2]

Ultimately, it comes down to the specific dealer specials, whether you qualify, and if the financial benefits from refinancing will pay off in the long run.

#3. Trade in Your Car and Roll the Negative Equity

While we recommend that you hold the car and quickly pay off the original loan, depending on your circumstances (i.e. need immediate access to a car, etc.), that may not be possible. In which case, trading in your vehicle and rolling the negative equity into a new loan is an option (however, a risky one).

Contrary to what some may think, you don’t have to pay the entire loan when trading in your vehicle, only the total negative equity amount[3]—which probably is a relief to the more than 60% of people looking to trade in their vehicles and get out of an upside-down loan.[4]

Handling the Trade-In Process

If you do decide to trade in your vehicle, make sure to check out reputable sites, like Kelly Blue Book, for standard trade-in prices. When it’s time to trade in your vehicle, be sure to bring your driver’s license, any corresponding keys and remotes, loan information (specifically, your remaining balance and account number), and insurance card.[5]

#4. Consider Voluntary Repossession

If you’re unable to make car payments and can’t seem to get out of debt, voluntary repossession is a possibility. Unlike repossession, which is mandatory and happens unexpectedly, the vehicle owner voluntarily returns the vehicle to the lender.

Specifically, the car owner notifies the lender that they will not be making payments anymore and intends to give up the car.

The lender and car owner then work out a time and place to meet. At the specified meetup location, the car owner surrenders the car and keys to the lender who then can sell the car if the payments stop coming in.

Whatever profit the lender makes off of the sale goes towards the loan amount, with the owner paying the remaining balance.[6]

Voluntary Repossession Affects Your Credit Score

Voluntary repossession or not, know that your credit score will suffer. However, voluntary repossession is always better than repossession; credit lenders who go through your credit history when you apply for a loan will look at voluntary repossession more favorably.[7]

Final thoughts: What Butler Car Dealerships Advises

With financial planning and budgeting, upside-down car loans can be avoided as early as the car buying experience. Car buyers can put down a large down payment to cushion the car loan, and setting aside emergency savings will help you make car payments during tough financial times.

If your credit score improves and you want to get a lower APR on your loan, consider refinancing early in the loan period, as interest hasn’t accrued. If you have to extend the loan length, you may want to think twice about refinancing; longer loans usually mean more expensive car loans and a bigger possibility of going upside down.   

Overall, taking these steps early on will decrease your chances of defaulting on car payments and ending up with an upside-down loan. However, if you find yourself upside down on a loan, know that you have several options at your disposal, refinancing and trading in your vehicle being two of them.

Still, your best bet is always to sit tight and pay off the original loan, negative equity and all. Doing so will prevent more debt, and consistent monthly car payments, even on an upside-down loan, can help your credit score.

Have you had an upside-down loan before? How did you get out from underneath the debt? Be sure to leave a comment in the comments section below.

Summary:

·         An upside-down car loan occurs when you owe more than what the car is valued at

·         You can end up with an upside-down car loan if your car is in an accident, you endure financial hardship and default on monthly car payments, or you initially put down a really low down payment

·         Since cars are more expensive, more consumers are taking out longer-than-average car loans; generally, the longer the auto loan, the more likely car buyers could end up with an upside-down loan

·         The best way to pay off an upside-down loan is holding the car and paying off the original loan car payment by car payment

·         If that isn’t an option, you may consider refinancing; you may be able to take advantage of dealer incentives like rebates and low-interest financing, which cuts down your negative equity; still, refinancing comes with risks, one being winding up with an upside-down loan again

·         You can consider trading in your vehicle and rolling the negative equity into your new car loan

·         However, be careful; you can easily end up recreating the same situation you’re trying to get of

·         Lastly, voluntary repossession is a possibility; make sure to call the lender and notify them of your situation

·         Set up a meet up time to drop the car and keys off

·         Know that your credit will suffer, however, voluntary repossession isn’t nearly as bad as repossession

·         Try to stay on top of car loans by paying a significant down payment, only refinancing if the interest rate is low, and having emergency savings in place should you run into financially tough times

For more information about upside-down car loans and Butler cars for sale, contact Precision Jeep, Butler cars dealerships today! 


[2] The New York Times: How to Buy a Car When You Have an Upside-Down Loan

[3] Nerd Wallet: How to Trade in Your Car When You Owe Money on It

[6] The Balance: Voluntary Repossession: Lower Cost, Less Chaos

[7] The Balance: Voluntary Repossession: Lower Cost, Less Chaos


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