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How to Handle an Upside-Down Car Loan

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Upside-down. Negative equity. Underwater. No matter what you call it, it means you owe more on your car than it’s currently worth. While it happens to most people who finance the purchase of a vehicle at some point, it’s not a good place to be — especially when you’re planning on selling the car or trading it in for a newer model.

It’s also a situation that’s becoming more common. According to the Edmunds Used Vehicle Market Report for the third quarter of 2016, a record 25 percent of all trade-ins toward a used car purchase have negative equity, and the average negative equity at the time of trade-in was $3,635 — also a record in the used-car market.

You can find out if you’re in this position by looking up the value of your vehicle using a research tool such as Kelley Blue Book. If the value is less than the balance on your current car loan, you are upside-down.

Part I: How do you get upside-down in the first place?

There are some reasons car loans may be upside-down.

Low down payment

Dealerships often offer incentives for new cars, including very low or no down payment loans. A new car loses about 20 percent of its value in the first year, so a small down payment can quickly cause the balance of your loan to soar above its actual value. A healthy down payment can help keep your loan balance in line with the worth of your car.

High interest rate

Remember to shop around for an auto loan, because the higher the interest rate, the less you’re paying toward principal each month. That makes it more likely you’ll become upside-down, even if you made a decent down payment.

Anthony Curren, a sales and marketing manager and salesperson with Rick Curren Auto Sales in Corning, N.Y., says he sees this happen pretty regularly when disreputable salespeople charge higher interest rates to make more money off a loan.

“This happened to my girlfriend before we met,” Curren says. “She had an 800-plus credit score and got stuck in a loan charging 5 percent interest. She should have been paying 2 percent or less at that time.”

Longer loan term

According to Experian’s State of the Automotive Finance Market report for the second quarter of 2017, the average length of a new auto loan is currently nearing 69 months. While longer loan terms may keep your monthly payment low, you’ll end up paying more interest, and you’re more likely to be upside-down.

Past upside-down loan

You could be upside-down because you carried negative equity over from your last car loan. Many dealers offer what’s known as a rollover loan: When people trade in an upside-down vehicle, the dealership rolls the negative equity into the purchase of their next car. With a rollover loan, you are upside-down before you even drive off the lot.

People who trade up for a new vehicle every couple of years are most likely to have car loans with rolled-over negative equity. In the first few years of a new car loan, your car depreciates faster while your loan balance declines the slowest due to interest. This means many people are upside down in the early years of their loans. The longer you keep the vehicle, the more likely it is that the loan balance will be less than the current value of the vehicle.

Being upside-down on your car loan may not pose a problem, as long as you are planning on holding onto the car until you have some equity in it. But if an unforeseen financial setback means you need to sell the car, you may need to come up with extra cash to pay off the loan difference. And if your car is wrecked or stolen, your insurance may not pay out enough to retire the loan.

Part II: How to get out of an upside-down car loan

The first step to dealing with an upside-down car loan is knowing your numbers.

Step 1: Figure out how much you owe.

The fastest and most accurate way to find out how much you owe on your loan is to contact your finance company. If you are planning on selling or trading in your car right away, you’ll need to know the payoff amount, not just the amount remaining on your principal. The payoff amount is how much you actually have to pay to satisfy the terms of your loan. It includes the payment of any interest you owe through the day you intend to pay off the loan, as well as any prepayment penalties.

You may be able to find this figure by logging into your lender’s online account portal. Otherwise, you’ll have to call the finance company.

Step 2: Figure out how much your car is worth

You can get a value estimate using Kelley Blue Book’s What’s My Car Worth tool. You’ll need to provide the car’s year, make, model, mileage, style or trim level (the alphanumeric code that helps identify at what level the vehicle is equipped), and the car’s condition. If you’re not sure how to rate your car’s condition, you can take a quick quiz to help you assess it.

Once you input those details, you’ll receive a range suggesting how much (or how little) you can expect to receive from a dealer for a trade-in. Keep in mind that every dealer is different, but you may be able to negotiate.

Step 3: Calculate your negative equity

If the payoff amount on your loan is greater than the value of your car, you are, as we’ve said, upside-down. Subtract the value of your car from the payoff amount to find out how underwater you are. If the difference is small, you may be able to make extra payments toward the loan’s principal to catch up. If the difference is significant, you may have to take more drastic steps.

Step 4: Strategize remedies

If you find yourself upside-down on your car loan, the most prudent course of action is continue to pay down the debt until you have some equity in the car. You can hasten the process by making extra payments toward the loan’s principal.

If that isn’t an option, here are a few other ideas.

Pay off the car with a home equity loan or line of credit

As with most things in life, there are pros and cons to paying off a car loan with a home equity loan or line of credit (HELOC). One advantage is that you can typically lengthen your repayment period, thereby reducing your monthly payment. HELOCs also have more flexible repayment options, compared with the fixed monthly payment that comes with an auto loan. This may be a good option if you’re having trouble making your monthly payment due to a temporary financial setback.

The second advantage of paying off your car loan in this fashion: The interest paid on your HELOC is typically tax-deductible, while interest on your car loan is not. Keep in mind that you’ll have to itemize deductions on your tax return to take advantage of this benefit. If you take the standard deduction, there’s no tax advantage.

But before you pay off a car loan with a HELOC, consider the downsides. First off, HELOCs are often variable-rate loans. If interest rates rise, your monthly payment could go up. Second, even if the interest rate on your HELOC is lower than the interest rate on your car loan, you could end up paying more in interest by stretching out the loan term. Finally, if you can’t make your HELOC payments, you could lose your home.

If you decide to take this route, make a plan to pay down the HELOC as soon as possible. Otherwise, it could well outlive your car, and you’ll be paying off the HELOC and a new loan for your next vehicle at the same time.

Pay off the car with a personal loan

Paying off a car loan with a personal loan could be a good option if you plan on selling your car without buying a new one. In that case, you would sell the car, use the proceeds to pay down the balance of the car loan, then refinance the remaining balance with a personal loan.

However, keep in mind that auto loans are secured by collateral (the car). If you’re unable to pay, the lender can repossess the car. Personal loans are unsecured. If you stop paying, the lender has fewer options for recovering the money. For this reason, personal loans usually come with higher interest rates than auto loans.

The Federal Reserve Bank’s survey of commercial bank interest rates for the second quarter of 2017 shows just how much higher those rates can be. The average 60-month new car loan comes with an APR of 4.24 percent. The average 24-month personal loan has an APR of 10.13 percent. So with the typical personal loan, you’ll pay more than twice as much interest in half the time. Hard to see that as a good deal.

Refinance the car loan

Refinancing your car loan can help in a few ways. You may be able to lower your interest rate and lower the term of your loan, both of which will help you get equity in your car sooner. Curren says deciding whether refinancing is the right option depends on the remaining loan term and interest rate.

He uses the hypothetical example of a person who, because of credit issues, used a subprime loan with an interest rate of 22.9 percent to purchase a car. “My advice to that person is to build their credit up as much as possible and as quickly as possible,” Curren says. “In one year, they should be looking at refinancing the loan with an interest rate as low as 6 or 7 percent, which is still relatively high, but much more palatable. It will save them thousands of dollars in repayment.”

However, Curren says he doesn’t offer the same advice to someone with only a year or two left on a loan. “At that point, the savings is minimal,” he says. “The better advice is to pay off the car quicker.”

Part III: What to watch out for when you have an upside-down car loan

Car dealers push the latest vehicle designs and advertise very attractive incentives for trading in your old vehicle, no matter how upside-down you are at the moment. But take heed: You’ll want to be very careful about trading in an upside-down vehicle for a new loan. Here’s a look at the problems that can arise:

Rolled-over negative equity

As we mentioned above, many car dealers are willing to roll the negative equity from your old car loan into a new loan. This is a popular option because it doesn’t require coming up with any money immediately. But it also means your new car will be underwater before you even drive it home. That new car may be fun to drive, but your monthly will be higher because it includes the cost of your new vehicle and the remaining balance on the old one.

Dealer cash incentives

Some car dealers offer cash incentives that can help pay off your negative equity. For example, if you have $1,000 in negative equity on your current car loan, you could buy a new car with a $2,500 rebate, use $1,000 of the rebate to pay off the negative equity, and still have $1,500 left over to use as a down payment on the new car.

But be wary of dealers advertising they’ll “pay off your loan no matter how much you owe.” The FTC warns consumers that these promises may be misleading because dealers may roll the negative equity into your new loan, deduct it from your down payment, or both. If the dealer promises to pay off your negative equity, read your sales contract very carefully to make sure it’s not somehow folded into your new loan.

Part IV: How to avoid an upside-down car loan

Being upside-down on your car loan, at least for a little while, is very common. But there are things you can do to prevent it from happening.

  • Make a larger down payment. Because a car depreciates by around 20 percent in its first year, putting down 20 percent of the total purchase price (including taxes and fees) can help you avoid going underwater.
  • Choose a car that holds its value. Some makes and models hold their value better than others. Kelley Blue Book, Edmunds and other car research sites regularly release lists of car brands and individual models with the best resale value. Do your research and pick out a car that will depreciate more slowly.
  • Opt for a shorter loan term. Longer terms are more likely to leave you underwater in the early years of the loan because you’re paying less toward the principal each month. Try not to finance a car for longer than you plan on keeping it.
  • Shop around for the lowest rate. The lower your interest rate, the more money you’ll pay toward principal each month. Don’t settle for the first offer you receive at a dealership. Shop around for a car loan before you go to the dealer, so you can feel confident you’re getting the best deal.
  • Avoid unnecessary options. Sunroofs, leather upholstery, rust proofing, extended warranties, fabric protection, chrome wheels — all these attractive add-ons are often overpriced. They’ll increase the purchase price of your vehicle, but rarely add long-term value.

Final thoughts

Being upside-down on your car loan is not an ideal situation, but you do have options. Understand the circumstances that led you to be upside-down in the first place can help keep the problem from recurring, or from carrying over to your next loan.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Buying a Car on Craigslist: What to Watch Out For

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Buying car on Craigslist
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Few of us consider buying a used car as a fun experience. It can mean countless hours visiting car dealers or combing through used car ads from private sellers on websites like Craigslist. Buying a car on Craigslist isn’t a bad thing — you’ll typically get a lower price from a private seller than you would at the dealer. But you also have to be on your toes for possible scams. Here’s what you need to know when looking to buy a used car on Craigslist.

Things to be wary of in Craigslist used car ads

As you look for vehicles, it’s important to understand that Craigslist is simply a place for private sellers and car dealers to list vehicles. There are no guarantees that you’ll be dealing with reputable people, and Craigslist doesn’t offer buyer protections. You could check the Better Business Bureau’s Scam Tracker, which tracks all types of scams, including those involving auto sales. Here are a few red flags that should warn you away from a seller:

You can’t get a vehicle history report. When answering a car dealer ad, it’s important to find out if you can pull a vehicle history report, according to Justin Osburn, a consultant with the National Independent Automobile Dealers Association (NIADA) — Carfax is one popular website offering such reports.

“The dealer should email it to you,” Osburn said. “And if you’re working with a private seller, they should provide you with a vehicle identification number (VIN). If they won’t give you this number, it’s a red flag.” For more, check out our used car checklist.

There aren’t any available pictures. “If there aren’t images, what are they hiding?” said Geoff Cudd, whose years of experience buying cars led him to found the education website Find the Best Car Price. He warns that a lack of pictures — or the use of only stock images — could mean problems down the road.

Too-good-to-be-true pricing. Osburn noted that sometimes used car dealers list a price that seems very low, and when you show up, you find out that it’s just the down payment. “We all have a sense [when] something’s off,” he said. “Pay attention to that.”

Dealer invoice or MSRP. According to Cudd, these phrases relate to buying a new car — so if you’re in the market for a used car, listings that include these terms probably aren’t going to fit the bill.

Seller asks to be paid by wire transfer. When a seller asks to be paid by wire transfer, that should set off alarm bells — especially if they want a portion of the money before they’ll meet you. They could easily take the money and leave you with nothing.

While combing through Craigslist, focus on listings with authentic images, and specific details about the car. You want to verify as much as possible ahead of time.

Tips for communicating with a Craigslist car seller

“You really don’t know what you’re getting with a private seller on Craigslist,” Cudd said. “You want to make sure you’re clear in your communication.” He also recommended starting out by using the seller’s preferred method of communication. Here are some of his other tips for communicating with a Craigslist car seller:

Communicate in writing when possible. Messages via email can be a good way to make sure that you understand what you’re getting. It’s easy to forget things or misunderstand what a seller says. However, when you communicate over email, you can refer back to information and terms.

Be polite and ask questions. Whether you’re on the phone or communicating over email, it’s important to be polite and ask questions. Keep communication professional and don’t be afraid to ask questions — you want to get all the information possible before making a transaction.

Find out why they want to sell the car. One of the best things you can do is ask why they want to sell the car. The answer can be instructive — and may even throw up a red flag.

Be sure to follow up quickly as needed. A truly good deal can be gone fast on Craigslist, so if you find something that looks promising, call or email as soon as possible.

Researching a car for sale on Craigslist

When you research a car for sale on Craigslist, you need to do more of the legwork. At a dealership, you have the ability to ask for a vehicle history report and see the cars immediately. When buying a new car, you have the posted price to start from. But with a private seller on Craigslist, you may or may not know the asking price or the vehicle’s history right away.

As you research a car on Craigslist, there some things to pay special attention to, according to Osburn:

Ask for the VIN and pull a vehicle history report on your own. For a fee, you can check out a car’s history through the National Motor Vehicle Title Information System or sites like Carfax or AutoCheck. “It’s worth getting this information so you’re aware of any problems,” said Osburn. “You might even be able to see service records and find out how well the car has been taken care of.”

Check for a “branded” or “salvage” car title. At a dealership, you can be fairly certain you’re working with a clean title. However, when you buy from a private seller, that might not be the case. Osburn advised to watch out for a “branded” or “salvage” title, words that indicate a car might have been totaled, or written off, in the past. “These cars should be worth less because of this situation and some sellers will try to hide that.”

Have the seller show you the title. Another problem, according to Osburn, is that some buyers don’t register the cars they bought. “It might have been a cash deal and the seller didn’t bother to go through the hassle of registration,” he points out. “However, you can’t register the car with the state if you don’t get the sign off of the person on the title.” Make sure the name on the title matches the name of the person selling the car.

Take the car to a mechanic. If you’re buying from a dealer that sells “certified pre-owned” or has some other guarantee, it might not be as important to take the car to a mechanic. However, when you work with a private seller, it’s vital to have the car checked out before you hand over your money. “Many mechanics will review the major components for a small price,” said Osburn. “They’re invested in doing a good job and maybe earning your service, and they can help you be reasonably confident you’re not getting a lemon.”

Research the price. Whether you buy from a dealer or a private seller, get an idea of the value of the car ahead of time. Use a website like Edmunds or Kelley Blue Book to enter car details and see what price range you can expect. This will help you decide how to proceed when you negotiate a final purchase price.

It’s also important to remember that sometimes used-car dealers post listings on Craigslist, points out Osburn. “Most dealers identify themselves in the ad,” he said. “Do a quick Google search to find reviews. You can find out a lot by the reviews and experiences of others.”

How to close the deal on a Craigslist car

Now that you’ve done your research, you know which car you want and you’re ready to complete a deal, it’s important to make sure you’re safe. You don’t want to get scammed — so as Cudd suggested, on the day of the deal, you should take the following precautions:

Don’t tell the seller you’re bringing cash. While robbery is rare, Cudd noted, the reality is that you don’t want to advertise that you’re showing up with thousands in cash. “You can also bring a cashier’s check, or use a service like Escrow.com to help you protect your money.”

Bring a friend. Rather than meeting someone alone, it’s a good idea to bring someone with you — especially if you’re a woman. “You’re more likely to be physically safe with a friend for backup,” said Cudd. “Plus the seller is less likely to try to pull one over on you when there’s another set of eyes.”

Meet in a public location during daylight hours. A public location offers you visibility, as does meeting in daylight. Additionally, you can see the car clearly during the day. You’ll want to go over the car carefully before handing over the cash.

Go for a test drive. See how the car drives on local roads and highways. You can also use this time to take the car to a mechanic for an inspection.

Get a bill of sale. Don’t just hand over the money and drive away — you’ll want proper paperwork for the state you’re in. “You can find sample bills of sale online,” said Cudd. “Bring one that can be filled out, just in case the seller isn’t prepared.”

Cudd also suggests asking to see a driver’s license so you can verify that the name on the title matches the name of the seller.

“Don’t be afraid to walk away if you don’t feel comfortable,” said Cudd. “If things aren’t going the way you planned, or if you think you might be getting scammed, just leave.”

Alternatives to buying a car on Craigslist

Your choices aren’t limited to a dealership or to buying a car on Craigslist, though. You can also find good used cars by looking on Facebook’s local marketplace. In many places, it’s still possible to see cars with posted “for sale” signs parked around town.

There are also many websites that specialize in used cars. Cars.com, Autotrader, TrueCar, and eBay Motors are all good places to start, Cudd suggested. Most of these sites offer listings that include some sort of payment and buyer protection that can help you avoid scams.

The bottom line

“For the most part, Craigslist can be a fine place to locate a used car to buy,” said Osburn. “Just be careful.”

Anytime you look for a car, it’s a good idea to shop around and compare prices — as well as used auto loan options.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Miranda Marquit
Miranda Marquit |

Miranda Marquit is a writer at MagnifyMoney. You can email Miranda here

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The Pros and Cons of Buying a Rental Car

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Buying a rental car
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Rental cars are usually newer cars with nice features for low prices, so what’s the catch to buying one?

Used cars that were previously rentals probably racked up lots of miles relative to their age, carry the wear and tear of different driving styles and may come in a limited number of colors or styles. We’ll help you decide if such a deal is worth the possible trade-offs.

Pros of buying a rental car

Though there are other places to shop, Enterprise, Hertz and Avis have the largest rental car fleets in the U.S., and each has its own outlet to sell used rental cars after they’ve outlived their rental service age. You’ll find a wide variety of vehicles — but not every vehicle — on these sites.

Here are five benefits to cars you may find:

Price. Former rental vehicles usually have a significantly discounted price, as much as $1,000 or more below other used car prices.

Maintenance. The vehicle was maintained, on schedule, by professional mechanics. Not by a sleep-deprived parent changing his own oil in the garage a year after he supposed to with the wrong type of oil to boot.

Maintenance history. Because the vehicle was professionally maintained, there should be a thorough maintenance record you can see.

Cosmetic condition. Part of the necessary maintenance of a rental car is cleaning it. The car should be in good cosmetic condition, inside and out; rental cars are commonly washed and detailed by car detail professionals.

No price haggling. If you buy a used rental car from a rental car sales outlet, you may not have to negotiate on price. Many such places don’t allow for price negotiation. Rather than potentially set an inflated price with the expectation of a staunch negotiation session, many rental car sales outlets set a nonnegotiable price that they consider reasonable. Like haggling? That’s why no haggling could be a con, too. See below.

  • But is it reasonable? Check what the car is actually worth by looking up its fair market value on a free, industry-standard website that dealers and lenders use for car valuation such as Kelley Blue Book or Edmunds.

Cons of buying a rental car

Former rental vehicles aren’t necessarily all good; they have their share of negative aspects. Here are the most common ones you should consider.

Wear and tear. Rental cars are usually driven a lot during a relatively short amount of time. The more miles driven, the more worn everything will be, from the tires to the radio buttons.

Potential repairs. Due to wear and tear from lots of mileage, things may need to be replaced or fixed sooner rather than later. Repairs and/or replacements may be needed earlier than one would expect based solely on the age of the vehicle.

Limited warranty. Rental cars may have no or little manufacturer warranty left. Most “bumper-to-bumper” warranties are good for three years, 36,000 miles and powertrain warranties for five years, 60,000 miles. If the car is older or has more miles, the bill for any needed repairs will come out of your pocket and buying an extra extended warranty can be expensive and tricky. Warranty companies don’t always have stellar reputations. If you are interested in one, however, read this extended car warranty guide on LendingTree. Note, LendingTree is our parent company.

Lower resale value. When and if you sell or trade in your used rental, it may be worth less than the same type of vehicle that was not a rental car. This may not be a terrible drawback however, given you probably paid less for it in the first place.

Limited inventory at dealerships. If you don’t live near a rental car sales outlet, you may find few rental cars available for sale at regular dealerships.

Is buying a rental car right for you?

If you are looking for a recent used car for a low price, buying a former rental car may be bull’s eye for you. But if all the cons have you thinking otherwise, here are some alternatives.

Buy a regular used car. You might be able to get a great deal on a regular used car. Here’s what to look for when shopping for a used car. If no haggling sounded appealing, there are sites where you can shop for — and buy — a car completely online.

Buy a (cheap) new car. If you think new car prices are out of your price range, you could be looking at the wrong new cars. Dealers often steer buyers to the highest trim levels of a vehicle (aka the most expensive). Ask to see a model with the base trim. The price difference between the highest trim level and the lowest trim level of the same car model can be around $10,000.

  • What is a trim level? A vehicle trim accounts for the amount of, or lack of, upgrades on a model. For example, the lowest trim level may have cloth seating and windows you roll up by hand. The highest trim level may have leather seating and a panoramic, power-sliding, glass moonroof.

Lease a new car. Leasing could allow you to have a new car with a low payment. It provides a lower monthly payment than financing a vehicle in order to purchase it. You can check out this article for more on whether you should lease a car.

What to watch out for when buying a rental car

The main things to watch out for when buying a rental car are signs of excess wear and tear on expensive things like the car’s suspension, brake lines and more. As it may be difficult for the common car buyer to know what and where to check for these things, we highly recommend that you have an independent mechanic inspect the rental car you plan to buy.

Independent mechanics may charge $100 for the service, but it’s a small dent in the savings you could see from buying a high-quality used rental car. On the flip side, it’s a small price to pay for saving yourself the much larger repair bills to fix a poor-quality rental car.

The bottom line

It’s up to you whether the early wear and tear on a former rental car is worth the lower sales price. If you plan on buying a rental car, consider taking it to an independent mechanic for an inspection so you can be more sure of its reliability.

Now that you’ve read up on car buying, you could prepare yourself and your wallet for the next step: car financing. Avoid these three common car loan mistakes, check out the best auto loans in 2019 for used cars and when you’re ready, you could check out our auto loan marketplace.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jenn Jones
Jenn Jones |

Jenn Jones is a writer at MagnifyMoney. You can email Jenn at jennifer@magnifymoney.com

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