How To Get Out Of An Upside Down Car Loan
With the credit crunch as it is, there are more and more car buyers who are upside down on their car loan. Finding your self in an upside down car loan situation means that you purchase a car from the car dealership for, say, $15,000, but after a period of about one year you owe about $12,000 but the worth of the car is $10,000.
In this case you are $2,000 upside down on your car loan. In this case, if you were to sell your car you will still owe the car dealership $2,000. This is why you have to be careful with the type of car you buy. Some cars like Toyota Camry and Honda have very good resell value
Solutions to Upside Down Car Loan
A Money Magazine report indicated that about 30 percent of current car buyers are upside down on their current auto loan. In many cases car dealers trick buyers with poor credit, bad credit or little credit into taking loans with stipulations that are not in the buyers interest.
When you are upside down on your car loan there is not much you can do to rectify the problem. If you feel that you were not treated fairly or with financial integrity by the car dealer you can contact your state Consumer Affairs office for legal solutions.
When you are upside down the unfortunate reality is that you will have to continue making payments on the vehicle until you have paid it off. Selling will not solve the problem as you will still owe the difference between the selling prices and the upside down amount.
One possible solution is to trade in your vehicle for one that is much less in value. Select a second hand vehicle that is reliable and have good re sale value. So, hang in there, service you car as required and keep paying of the loan so that it does not harm you credit. The faster the better.
Another alternative is refinancing. If you could locate a bank or car dealership that would be willing to refinance the car at a lower interest rate this would help in reducing payments amount and get you out of the upside down situation. You may have to incur a early payment penalty, but that is usually small compare to the upside down amount. Fortunately, in many cases, dealers also give incentives for early payment as well.
The final decision you could make is to allow the car dealership or bank to repossess the car, but that could lower you credit score and make things difficult for you to obtain a new loan in the future.
Preventing an upside down car loan
In this financing credit environment you should be meticulous in preventing from being in an upside down car loan situation. Here are some tips to avoid falling into this trap.
First, ensure that you credit is in good health. Get a free credit report from annualcreditreport.com. Pay your bills on time and ensure that everything on your credit report is accurate. Try to save a little and put at least 10 percent down on your car loan, 20% would be ideal. This will give you negotiating power and may help to reduce your interest rate.
Determine the true value of the vehicle by studying the Kelly Blue Book or NADA guide.
Avoid car dealership offer of extra low monthly payment. This will only let you pay for the car for a longer period of time and could result in higher interest rate.Opt in for a higher monthly payment, short financing term with lower interest.
Do not apply for auto loan, specially on an old car for more than four (4) years. Do not take a 60 to 72 months used car loan.
It is advisable that you buy a used car instead. New cars loss about 20% of their value from the time of leaving the dealership. A reliable used car is the best option. Even the best selling book “Rich Dad, Poor Dad” advises even the very rich to purchase a used car.
Most new vehicles loss about 30% to 40% of their value in a couple years. By opting to purchase used automobile you have allowed the dealership to incurred the cost of the depreciation over the first couple years