What If I Owe More Money on My Deal Than It’s Worth?

Getting “upside down” on your car loan is very common because of the fact that vehicles always depreciate in value. As soon as you start revving up that engine and out of the dealer’s lot, 20% of the car’s value is lost.

Being upside down means owing more money on your vehicle than its actual worth. This might pose a problem especially when you decide in getting a new car. No need to be upset though, there are many possible solutions to this dilemma.

But first off let us lay out the facts one by one:


Fact 1: You owe your lender money and you must pay them back.

        For instance, you have yet to pay your lender $11,000 but your car is only worth $8,000. Obviously, you’re $3,000 short and you need to look for a way to settle your debt.

        There are a number of ways in which you can solve your problem. First option, you find a second job in order to earn extra money. Second, maybe you can sell something of yours that is valuable such as an old iPhone or laptop. Third option is that either you can take out a home equity loan or you can roll your current debt into another vehicle.

        Either way, each of these paths has its own advantages and disadvantages. But at the end of the day the decision solely rests on your hands.


Fact 2: You can improve your situation by reducing loan amount, negotiating better loan terms or stretching the loan duration.

        The fact is you need to settle your debt whether you like it or not. Depending on your current financial state, you can either pay your debt right away or maybe you can extend the loan duration so that bit by bit you can eventually settle your debt.

        In order to lessen the burden that you are carrying, you can transfer your debt to a lower-interest loan or even consider refinancing your loan. Although you’d incur more interest if you extend the length of your loan, it also gives you a wider array of options on what is the best way of managing your debt. You can choose to be very thrifty sacrificing personal pleasures and what not or use your ten years’ worth of savings so that you will be done with it once and for all. Or maybe stretching the duration a little bit is the more suitable way for you to manage your financial dilemma.


Fact 3: Maximizing the resale value of your car is a must.

        Your best solution might be staring at you the whole time! You car is one of the most valuable assets that you can sell in order to somehow get a little bit close in settling your debt. Thus getting the maximum resale value of your car is vital. This is surely a faster way of generating  money compared to selling your mobile phone or laptop. You can go to a dealer now and try to negotiate the best price for your vehicle. Remember, always be mindful when agreeing to a deal and it can never hurt do your own research so that you won’t get ripped off.


How You Got Upside Down on your Loan

There are a lot of possible ways of messing up your financial situation. From making a very bad decision to correcting that decision with a worse decision consequently piling up a very huge financial mess.

Here are some mistakes that could lead you to get upside down on your car loan:


  1.  Buying a car that you Can’t Afford.

Not all cars are for us. Some are really gunning for expensive cars like Ferrari, Mercedez Benz and other luxury cars while some are content in an ordinary sedan or mini-van. Buying a car that is as they say “way out of your league” is the easiest way of ending up buried in too much debt.

Always weigh your priorities and consider unexpected scenarios such as medications and house repairs. Financial experts suggest that a car payment must not exceed 10% of your gross income. This means that if you make $50,000, the budget for car payment must not go beyond $500 per month.


  1.      You didn’t put a Down Payment.

Choosing to make a down payment is ideal because it reduces the total amount that you owe. Cars depreciate by 20% as soon as you take it out of the lot. It is always better to ensure that your down payment covers this initial loss of value. Another option is to avail gap insurance which covers the difference between the insurance payout and remaining debt of the loan.


  1.      High Interest Rates and Long Loan term Duration.

There are many factors that affect an interest rate, but the most crucial one is your credit score. Having a high credit score (i.e. 700) might possibly result to a very low interest rate while on the contrary a low credit score (i.e. 400) will most likely result to a very high interest rate. Other factors such as, work history and current income also influence your interest rates.

        Furthermore, extending loan term duration can also cost you more money. This is because monthly payments are amount borrowed plus interest divided by the loan term. Extending your loan term lowers your monthly payments but it also results to more added interest (more months paying interest) and usually at a higher interest rate. Although every financial situation is unique, calculating ahead before making a decision is important.


  1. Rolling a Previous Car Loan into a New One

Rolling an old car loan to a new one can surely provide financial relief. But this is just a temporary solution. Keep in mind that adding a previous car loan into a current one will increase the total amount of auto loan debt. You still have to pay the previous car loan no matter what.

Some dealers promise to pay your previous loan but the catch is your current loan will still be rolled into your next round of financing. This could result to higher monthly payment, an extended loan term duration or even both!


Ways to Recover from an Underwater Car Loan

Cut and Pivot

Selling your vehicle right away might be the right decision. But there are other alternatives that you can consider before doing so. These are some strategies that might just help you recover from an upside down loan and can even put you in a better financial situation.


Maintaining Car Payments until you can Settle your Debt or Afford the Difference

Cutting a deal that will extend your loan term duration can ease your financial burden. Although it can cost added payments to interest, still having a lower monthly payment can really help you get out of this financial struggle.

If there are unnecessary expenses in which you can cut back a little then do so. Concentrating your financial resources to more important obligations, such as you auto loan, might help you come closer to breaking even. A few extra dollars is already big especially when you’re underwater.

Supposing that you can still afford to do so, adding a few extra dollars to the regular monthly payment can also help you get closer to repaying your car loan. But it is important to check with your dealer first for prepayment penalties before doing so.

Furthermore, taking the bus or train  rather than using your car can help you save more money. This will divert your cash into paying your loan rather than in gas money or in car maintenance. Another option is to park your car into your garage and cancelling your monthly insurance for a while just until things are back to normal

 Refinance your Loan

You can contact your dealer or bank about refinancing your loan and negotiate terms that is easier on your budget. If you can ask for a lower interest rate, the better so that most of your monthly payments will actually cut down the principal amount (instead of going to interest payments).

If asking for a lower interest rate is impossible, extending your loan term duration will provide temporary relief. A longer loan term duration will mean lower monthly payment but higher interest payments overall. Still, a lower monthly payment can provide a small relief in your financial problem especially if you can’t afford the original monthly payment amount.

Put in mind that a repossessed vehicle in your credit history is a credit issue that can stay in your record for a couple of years. This will make your life more difficult (than it already is) if you plan on getting another car loan in the near-future.

Transfer your Debt

Making your troubled financial situation more manageable is a good start. That is why transferring or shifting your debt to a credit card (with a balance transfer offer) can be one of your options. Although it is just a temporary solution, you can still have a chance of enjoying up to one year of credit without interest. You can then take advantage of this momentary breathing period by looking for more ways to generate extra money or look for a more permanent solution.

Always bear in mind that when the introductory period ends, the implemented interest rate may suddenly increase your balance. It is wise to clarify everything first to your new lender before agreeing to a new contract.

If you are a homeowner, a home equity loan is a better alternative. Transferring your debt to a home equity loan with a low interest can certainly take a huge load off your shoulders. To add, having a good credit history can also give you the chance of transferring your debt to a lower interest loan.

Alternative Ways to Raise Cash

You need cash as soon as possible and cutting unnecessary expenses may not be enough. Here are some ways that you can immediately get extra cash:

  1. Selling your Belongings. There are a lot of hidden treasure lurking in your garage or up in your attic. Letting go of some stuff and selling it can slowly get you back up your feet. If you’ve paid 75% of your auto loan, then generating that 25% must be your focus. You know what they say, you did not come this far just to come this far. So be patient and push yourself to work for that 25% remainder.
  2. A Second Job  or Overtime Work might do the Trick. Looking for a second job or working overtime to avail a premium rate is certainly a good way of earning extra income. Good old hard work and sacrifice will help you solve your financial troubles.
  3. Selling your Car. You should use Canadian Black Book as reference when trying to get a price on your vehicle. They usually use the car’s model, year, mileage and overall condition as bases for a price. Take note that a dealership trade-in is different from private sale prices. Moreover, you can also use online sites such as eBay or Craiglist as added research information about typical selling prices. Lastly, talk to your lender first before selling your car since technically, you don’t own your car (due to the fact that you still haven’t paid in full). Approaching your lender first about your plan will make the overall process run more smoothly.
  4. Dealer Trade-In The main benefit of choosing a dealer trade-in rather than selling your car on your own is that you’ll get a check or cash right away. Having a dealer take care of business also saves you time and the hassle. From looking for a potential buyer to straightening out contracts, surely a dealer can give you a more hassle-free experience. To add, dealers are more than willing to extend credit to a potential buyer because they get to have a car off their lot. This way you can roll your current car loan debt to another loan. You might also enjoy rebates that may be enough to pay off what you owe on your previous loan.  You can also go for a lease agreement if a dealer gives an exceptional low rate. Rolling your current debt into a lease payment can make things easier for you. Eventually when the lease is done, you are free of your debt. However, you won’t have any equity in a car to trade in.
  5. Private Sale. Opting to do it yourself will likely result to you getting the maximum amount possible out of your vehicle. That’s amazing right? But take note that selling a car on your own takes a lot of time, energy and a lot of research. Not to mention contracts and other paperworks that you need to prepare if you are lucky enough to find a buyer.

You can also pay someone to do the bid for you – this is called a consignment. Consignment businesses’ rate vary. Others charge a flat fee while some charge you based on a percentage of the sale.

Taking your time to compare the two different methods of selling your car is important in order to get the best possible deal out of your car.

So what is it gonna be? Still confused on what’s the ideal option for you? New Car Canada can help you decide. We can find ways to satisfy your needs and provide you with the best solution. Contact us or fill out our easy online application form.