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Auto Loan

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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Auto Loan

This Is What You Should Know About Private Party Auto Loans

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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Buying a used car can be a tricky process, from getting approved for financing to checking out the history and maintenance of the vehicle. But what happens when you want to buy a used car from a person rather than a dealership? Before you purchase the car you’ve been eyeing, it’s helpful to learn the ins-and-outs of private party auto loans, where to shop around for them and how to make sure you are getting the best deal.

Here are some guidelines on how to navigate the used car industry and get the most competitive interest rate for your auto loan.

What is a private party auto loan?

A private party auto loan is one option for would-be car owners purchasing a used vehicle from an individual, rather than a dealership. Those who don’t have the savings to pay for the car will need to seek financing from a lender who offers private party auto loans.

Where can you find private party auto loans?

There are many lenders who offer private party auto loans, including banks, credit unions and online lenders. These lenders have their own specific requirements for things like minimum credit score, income and down payment, and could also have a maximum limit on the age of the vehicle and the number of miles it has accumulated.

APRs for used vehicle loans are also generally higher than ones for new cars. Used cars depreciate more in value because there is more mileage on the vehicle, along with more wear and tear on the engine, tires and other parts. The lender is taking on more risk and, in turn, charges a higher interest rate.

The length of a private party auto loan is similar to that of loans for new and used cars that have been purchased directly from a dealer.

Steps to take before you buy

After you’ve narrowed your search to the vehicle you want to purchase, you should start shopping around on how to finance it. Decide how much money you want to put toward a down payment from your savings or if the trade-in value of your car will be sufficient. The more money you have for your down payment, the lower your monthly payments will be.

Another important factor to look out for is the interest rate for your potential loan — a lower interest rate means that more of your money goes toward the principal of the loan. Make sure you compare auto loan rates from various lenders, including banks and credit unions. Banks will sometimes give a better rate if you are already a customer, though the lowest rates are often offered by credit unions — see if there is one in your neighborhood that you qualify for if your employer does not belong to one.

You’ll also be able to find out which lender offers the lowest APRs by comparing them online. You can compare rates from up to five auto lenders with LendingTree’s online marketplace by entering some basic personal information.

LendingTree
APR

As low as
3.09%

Terms

24 To 84

months

Fees

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that they allow you to compare multiple, auto loan offers within minutes. Everything is done online. LendingTree is not a lender, but their service connects you with up to five offers from auto loan lenders based on your creditworthiness.

Still, one important thing to remember is that each time a lender checks your credit score, your overall score will be impacted. Coordinate your searches for auto loans only when you are ready to make the purchase so that they occur within a 14-day period, which has less of an impact to your credit score.

The way to determine the best price for a particular brand and model of a vehicle is to compare selling prices from industry standards, including the the National Automobile Dealers Association, Kelley Blue Book and Edmunds. These guides are also helpful if you’re trading in your car and want to use the proceeds for a down payment.

Until you are ready to purchase a vehicle, continue to shop around on auto marketplaces or dealer websites. They could offer a discount for cars in different colors and features that may not be a priority for you.

Save your online research and show an individual car owner what other dealers are offering. Show them what their competitor’s price is and see if they are willing to lower their price.

Alternatives to a private party auto loan

Obtaining a personal loan is an option, especially for car owners with lower credit scores or shorter credit histories. Personal loans are typically used by consumers to pay off high-interest debt, like credit cards. An individual could apply a personal loan toward the purchase of a used car, along with a down payment, instead of seeking a private party auto loan.

However, while personal loans allow an individual to borrow a set amount of money for a fixed period with a fixed interest rate, their interest rates are often higher than an auto loan that has collateral (the car itself). These loans usually range between 24 and 60 months.

Another option is a home equity loan. You can qualify if you have enough equity in your house, which is used as collateral. These loans, available from lenders including banks and credit unions, can be used for various purposes. Once you are approved, the lender will give you a lump sum of money, which can be used toward the purchase of a vehicle.

You’ll make monthly fixed payments when you receive a home equity loan, similar to how a traditional auto loan works.

The bottom line

Car buyers have several loan choices they can make before committing to a major purchase. Private party auto loans are another common option to finance your vehicle. Once you’ve chosen the vehicle of you want to buy from another individual, you should check your credit history and the value of your current trade-in, and decide whether you’re able to make a down payment.

Start shopping around for private party auto loans to get the best interest rate and a lower monthly payment.

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.

Ellen Chang
Ellen Chang |

Ellen Chang is a writer at MagnifyMoney. You can email Ellen here

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Auto Loan

No Money Down Car Loans: Do They Exist?

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.

No-money-down car loans
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Buying a car can be a frustrating experience. Between shopping, filling out paperwork and figuring out the down payment, the process is stressful for many. Thankfully, there are many options available for car buyers, even for people with poor credit, those who can only make a small down payment (or none at all) or someone who does not have a trade-in vehicle. But beware that you’ll often pay a higher APR in these circumstances.

How your interest rate is affected

The best APRs typically are given to people with higher credit scores who have a down payment or trade-in.

Individuals who have a poor credit score because they do not have a long credit history or did not pay their bills on time in the past will most likely be offered a higher APR from a lender.

Someone who does not have a down payment — or only has a small amount like $100 — will also likely pay a higher APR. So what can you do?

How to negotiate for a no-money-down car loan

If your credit score is poor — which can be defined as between 550 and 649 — and you do not have a down payment, you can make your case that you are a good candidate for a car loan by talking up some other factors.

Explain how long you have been employed at your current job. Lenders like to see that you have steady employment because it means you have regular income and can hopefully make payments each month. Staying with one company for an extended period shows that you are more reliable and do not have gaps in income.

Another factor that makes you look more responsible is maintaining the same apartment or residence for at least a year. This shows that you make monthly payments and could be reliable.

Keeping your debt to a minimum and having multiple offers can also help in your negotiations.

You can also now boost your credit score by allowing your cellphone, cable and utilities payments to be included in calculations. Separately, you can show a positive payment history by obtaining a secured credit card.

Shop around for a no-money-down car loan

Do your homework for the right loan and the right car. Start by comparing auto loan rates from lenders online or talking to your credit union or bank where you have a checking or savings account.

Shopping around for an auto loan is the only way to know which lenders offer the best APRs. Just getting one or two loan offers, or relying on the one from the dealership means you could be missing out on savings.

LendingTree
APR

As low as
3.09%

Terms

24 To 84

months

Fees

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that they allow you to compare multiple, auto loan offers within minutes. Everything is done online. LendingTree is not a lender, but their service connects you with up to five offers from auto loan lenders based on your creditworthiness.

After you have multiple loan offers, choose the one with the best APR because a lower interest rate will save you money during the life of the loan.

You can fill out a short online form and compare rates from up to five auto lenders through the LendingTree online marketplace. It’s important to remember that while some lenders conduct a hard pull on your credit, getting multiple hard pulls will count as just one if within a 14-day span.

You may have had your eye on a certain brand and model of a vehicle for several months, but make sure you are getting a fair price by comparing selling prices, including through Kelley Blue Book, Edmunds and the NADAguides. You can use these guides if you are trading in your vehicle.

Don’t just go to the auto dealership where you bought your last car or the one you drive by often. It’s easy to look up dealers online and see the prices for which cars are being sold.

Being flexible can help you save more money — even a different color could save you hundreds of dollars.

Dealerships want to sell you a car, so show them what their competitor’s price is and see if they will match or beat it.

Other tips

You can negotiate for a better interest rate if you can save a small down payment. Lenders prefer receiving even a few hundred dollars as a show of good faith toward a new loan.

If you can not provide a down payment, even a trade-in of an old vehicle might help you get a no-money-down car loan at a fair interest rate.

Getting pre-approved for an auto loan can help you walk into a car dealership with confidence and secure you the lowest APR.

The bottom line

Even though purchasing a car can be a complicated experience, doing some research can make the process easier and faster, even if a buyer can’t put any money down on a loan.

You can avoid some major headaches if you shop around for a vehicle, check your credit score, see how much your current car’s trade-in value is and determine if you can provide a down payment.

You, as a car buyer, have several choices before committing to a major purchase.

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.

Ellen Chang
Ellen Chang |

Ellen Chang is a writer at MagnifyMoney. You can email Ellen here

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