An increasing number of people are upside down on a car loan because of the easy financing available from car dealers in an extremely competitive market. However, one should know how to get out of an upside down car loan by following a strategy of self-restraint and a smart refinancing of the existing loan. Here are a few useful tips that can help to come out of this trap:
1. Sell the expensive vehicle and opt for a cheaper one
If your car’s market value is depreciating much faster than your ability to pay off the loan, it may be time to take serious measures. It is likely that your car may not be sold for a sufficient value to pay off the full amount of loan that still remains to be paid. Nevertheless, this is your best option in the given situation because it will at least help to clear a major portion of the loan. Say, if your pending loan amount is $25,000 but your car is sold off only for $20,000 in the secondary market, it is still worth it to sell off and repay $20,000 so that you are left with only $5,000 balance amount of loan which is much more manageable. You may also add another $5,000 car credit loan for a used car that you may have to buy. Even then, you would have managed to reduce your overall loan burden by $15,000 effectively.
2. Refinance your balance loan amount
You may be losing a lot of money in interest on an expensive auto loan. Even after you have managed to reduce this loan burden substantially, it is still worth consideration to refinance the remaining amount of loan through cheaper sources. Check out the rates of local credit unions or a lending club in your area that may provide a cheaper loan. Alternatively, consider the option of using your home equity to acquire a much cheaper loan. You can use this new loan amount to pay off the expensive auto loan, and reduce your monthly interest costs substantially. This will make your loan payments more manageable, and not push you once again into an upside down car loan situation.
3. Make larger monthly payments on your loan
If you have some spare money sitting idle in your savings account, or your monthly income allows you to pay off the loan relatively quickly, make an effort to do that. If you pay off your loan with larger monthly installments, your interest burden will reduce much faster. That is a good way to stay away from the debt trap and serves as a useful strategy on how to get out of an upside down car loan.
4. Let the car go back to the finance company.
This should only be done as an absolute last resort. If you allow the car to be repossessed for non-payment your credit report will suffer substantially. When you look for your next car it will be hard to find car financing with bad credit. Banks and finance companies are tightening their rules and they are not giving out loans willy nilly like they did a few years ago. A person’s credit score matters a again and you will find it is very difficult to buy a car with bad credit.
Before you even contemplate letting the car go back you should try to raise the extra cash you need some how. Maybe you need to take a second job or maybe you need to cut out some expenses no matter how hard it hurts. The bottom line is, an upside car loan can be treated in a way that does not hurt your credit rating but it will take some work.