How Being Upside Down On Your Car Loan Can Complicate Your Debt Status

How Being Upside Down On Your Car Loan Can Complicate Your Debt Status

When you owe more money on a loan than the value of the asset that was purchased with the loan, you have what is called in the financial sector, negative equity. In the automotive loan sector, this concept is more popularly known as being upside down. Even though you can classify a car as an asset on your balance sheet, at the end of the day, it is only an expense because it loses value continuously. Being upside down on a car loan can be quite a dangerous situation for those who are already in debt. This is because in case you face a problem with making the due monthly payments on time, selling off the vehicle will not cover the loan balance and you will still have a deficit to cover and you may need to take another loan to settle with the lender, a process that will drive you deeper into debt. You will also be driven deeper into a debt trap in case you trade-in your car when the loan on it is still outstanding and the lender rolls over the unpaid balance into the new car loan. According to, which quotes an study, around one-third of all vehicles traded in at the dealerships were worth less than the loans outstanding on them.

How Do You Get Upside Down On A Car Loan?

To be able to get out of potential trouble of an upside-down car loan, you need to be able to understand how and why it is possible for you to even get into the situation. As mentioned earlier, a car is an asset that depreciates very fast. It is said that a new car loses at least 20% of its value, the minute you drive off from the showroom and within three years, it is hardly worth anything in resale value. If you had given a small down payment at the time of the purchase, it is very likely that right from day 1, you are upside down on your loan. The extent of the deficit depends on how much you have overpaid for the car either because you did not do enough research on the market price of the model or you were conned into buying expensive accessories and features that do not add any actual value to the car. One of the most common reasons why people end up being upside down on car loans is that they buy a new car even before they have paid off the loan on the old car. Enthusiastic dealers are only too happy to roll over the loan balance into the new loan, leaving you with a very high monthly payment because you are actually paying off two loans at the same time. Customers thrilled with their new acquisition have no clue that they are already upside down on the loan and can get trapped by the debt in case they have a problem in making the monthly payment for any reason.

Is Being Upside Down On A Car Loan Necessarily A Problem?

As you can appreciate getting upside down on a car loan can happen to anyone if they are not on high alert regarding the various traps they can encounter while buying a new car. However, it is not necessary that being in this situation is bad. In fact, many customers with a stable income and strong cash flow don’t even realize that they had been upside down on their car loans and go on happily to pay off the loans without a hiccup. However, the real problem surfaces when due to any reason, you are no longer able to pay the monthly due amounts comfortably according to a consultant. The reason could be as diverse as a loss of employment, divorce or death in the family or even unexpected medical events that leave you holding a large bill and possibly no income for quite some time. Being upside down in such a situation means that if you default and the car is repossessed, the sale value will not cover the loan balance and you will be asked to make good the difference. At a time when your income is distressed, the chances of your being able to a fresh loan to settle the loan are difficult and you may have to pay a steep rate of interest if your credit score has already been damaged.

How To Get Out of The Upside-Down Situation And Avoid Getting Trapped In Debt

The only way of resolving a potential debt problem is to pay down the excess debt as soon as possible and then tackle the repayment of the balance amount so that you can become completely debt-free in a reasonable period of time. To get out of a loan agreement that you can no longer afford, you can examine the following strategies:

Refinance the loan: Generally, even if the interest rates have moved down significantly, the original lender will not be amenable to revising it for your benefit. You should examine the possibility of refinancing the loan with another lender who is ready to give you a better rate. However, the actual decision should take into account any penalties for loan foreclosure by the current lender and the down payment and other loan origination charges charged by the new lender. Your credit score will play an important role in the sort of interest rates you will be offered.

Use a credit line to repay the excess debt: Using a credit card to get rid of debt can seem suicidal due to the normally-applicable high APRs. However, if you can access a low-interest or even a zero percent offer, it can make great sense if you are reasonably sure that you can pay off the balance within the promotional period. Peer-to-peer lending networks can sometimes also offer you really cheap loans.

Sell some assets to raise cash: If you have assets like a second vehicle, a boat or even some furniture that is just lying around, you can consider selling them off and repaying the car loan to an extent that you are at least no longer upside down on it.


It can be extremely challenging to be upside down on a car because it can mean that you will need to borrow more money to pay off the lender in case you are unable to afford the monthly repayments due to any change in your financial circumstances. However, you can avoid getting trapped by debt by being alert to the problem and by employing a disciplined and organized approach to managing your finances.


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