2 February 2018
One of the problems that can lead to disaster within personal finances is car loans that become anchors around the necks of car owners. Many people refer to this as upside down or underwater loans. This condition can be applied to any machine that has a motor in it. The value of a vehicle can go down (depreciation) up to 60% during the first 4 years of ownership. Everything from the newest SUV, motorcycle, or aquatic vehicle can become the bane of every personal financial budget.
If you have an upside-down car loan it means the amount you currently owe on your loan is higher than the car’s value. This is also known as being under water. The marketing and lending forces currently at work are doing a fantastic job of putting drivers of these “toys” into the front seat. This limits your options because if you don’t want the vehicle anymore, you have to come up with extra cash just to sell it. No magic fix is available to painlessly make this issue disappear, but you still have a few options:
- Sell the vehicle yourself through a private sell. You can get more cash selling this way versus a trade in. The difference can be paid by borrowing cash from a local community bank or credit union in a smaller amount to bridge the gap. It is a small loan to clean up a large loan situation.
- Know how far your vehicle is underwater. Subtract the value of the car from the loan balance. The difference between the two numbers is the amount of money you would need to come up with to pay off your loan if you sell or trade in your vehicle. This amount is also called your negative equity. This is the beginning of putting together a plan that can lead you out of a bad situation. Online and digital options are also available to help with this step.
- Keep the vehicle if you want to pick the best solution. If you keep the car until the loan is paid off there is no risk you will be upside down because you don’t owe anything on the car.
- Get a new loan at a lower interest from a local bank or credit union. You will likely still need some cash to bring the balance of the loan closer to the vehicle’s value. If you aren’t able to refinance your loan, you can always voluntarily make higher monthly payments to pay your loan off faster.
- As a last resort, trade the car in. Look for incentives such as extra cash, which can help pay off your negative equity. The smartest financial choice is to keep the car as long as possible or until the value equals the loan.
If you are looking for a better way to manage money for your family, have experienced a change in your family situation, or need help setting up a budget, click on Lighthouse Financial Coaching or call (512) 971-6739 for a no-charge introductory appointment and start getting organized with your money today.