I’m Upside Down. HELP!
If you’ve owned more than a few cars, odds are you have been upside down at one point or another. It happens to the best of us. If you are not sure what “upside down” is, you’re in luck. It has been called a few different things but the more common terms are upside down, underwater, or negative equity situation. In short, it means you owe more on your auto loan than it is worth. For example, you might have a 2013 Explorer and owe $27,000 on it but it is only worth $23,000. You would have $4,000 worth of negative equity.
How did we get here?
There are a few different ways you can find yourself in a negative equity situation.
You could have paid too much for the car, rolled prior negative equity into your current car, or financed for too long of a period. We have this happen more when consumers purchase a new car, put $0 down, and try to trade out of it within a year or two. The purchased car has depreciated and odds are, you haven’t made enough payments to come out ahead on the loan.
What does it mean for my credit?
Luckily, credit scores do not take car values into consideration when calculating credit scores. Of course the value of the loan is reported on your report but never the value. You’re in good standing as long as your monthly payments are made on time.
Am I stuck and what do you recommend?
You are never stuck. There are options but you have to be flexible. Your best option of course is to pay the vehicle off. Stick it out and drive that vehicle until the end of the loan. If this is not an option for you and you have to be out, there are a few things to understand. The first is that negative equity goes somewhere! It has to be dealt with at some point. Depending on just how much negative equity you have, you might be able to roll it into the new auto loan. General rule of thumb is for every $1,000 financed add $22 to the payment. If you are $4,000 underwater, be prepared to add at least $88 to your base monthly payment of the new car. This could make or break a budget for some.
A great option for those who are DEEP underwater is to lease. This is highly recommended as if you are approved for the lease, you’re only paying a portion of the negative equity during the duration of the lease. After your lease term is up, you walk away from the negative equity and the car. The payments are a bit higher but it is completely worth it to exit the negative equity situation.
Remember that each situation is different and what we might recommend for person A won’t be recommended for person B. Chat with us and allow us to show you some options to save you if you ever find yourself in this situation.