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How to Get Out of an Upside-Down Car Loan

So, you’re the unlucky owner of an upside-down car loan? That really stinks. But don’t worry—we’re here to help.

Whether you fell for that new-car smell and took out a bigger loan than you could afford, made too small of a down payment, or got shortchanged by a dishonest dealer, you can clean up this mess. But it is going to take some hard work.

If you’re ready to put in the work and get rid of this thing for good, here’s a look at how to do it.

What Is an Upside-Down Car Loan?

You’re upside down on your car loan when you owe more on the loan than your car is currently worth. Let’s say you’ve got a $15,000 balance on a car loan and your car is valued at $7,000. That means you’re $8,000 upside down. 

Yup—it’s a huge bummer. We feel for you. So let’s talk about how you can clean this mess up.

How to Get Out of an Upside-Down Car Loan

Now that you know what an upside-down car loan is, let’s talk about how to get out of one. Because even though it may feel like you have a giant mess on your hands right now, you can absolutely clean it up. Here’s how.

1. Crunch the numbers.

There are three numbers you’ll need to identify before you can get out from underneath an upside-down car loan, starting with the remaining balance on your loan. Then you need to figure out the current private sale value of your car (a search on Kelley Blue Book is a good way to do that). Finally, subtract the value of your car from the balance of your loan to see exactly how much your loan is upside down. Here’s an example of what that might look like:

Remaining Loan Balance: $21,000

Private Sale Value of Your Car: $17,000

The Difference: $21,000 - $17,000 = $4,000 upside down

Why are those numbers important? Well, for starters, you’re going sell the car in the next step (spoiler!), so you need to know how much to sell the car for. And you need to know how much your loan is upside down because you’ll have to come up with that money before you can actually sell the car.

How do you come up with that money? That’s what step two is all about.

2. Make a plan to sell the car.

If you want to get out of an upside-down loan, you’ve got to sell the car. That’s right—it’s time to amputate the Tahoe (or whatever car you’re underwater on). But first, you’ll need to get the title so you can give it to the new owner, and that will require paying off your loan in full.

Because the value of your car is less than the balance of your loan, that means the money you get from selling your car won’t be enough to pay off the entire loan—you’ll have to get the rest of the money someplace else.

There are two ways you can get that money.

  • Method #1: The first method is the old-fashioned one: saving the money. If you’re still able to make your car payments and you aren’t in an emergency situation, it’s okay to hold off on selling the car until you can save up the cash to pay off the remaining balance of the loan and get the title.
  • Method #2: The other option is to take out an unsecured personal loan for the difference between your loan balance and the car’s value. Personal loans are almost always a horrible idea. But in this case, getting one would let you sell the car and, potentially, get a smaller interest rate. Going this route may feel quicker and easier, but it’s important to remember that you’d still be in debt—and debt is always risky.

So, which method should you go with? Truth is, it’s really up to you and your individual situation.

If you’re drowning in car payments or you’re just plain sick of looking at the stupid thing sitting in the driveway, getting a personal loan so you can move on quickly is probably the best route for you.

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If you aren’t in that situation, or if your credit score is too low for you to get approved for an unsecured loan, then saving up the difference in cash is your best bet.

So, figure out which method is best for you, and devise a plan to make it happen.

And either way, make sure you get the most value for your car by selling it yourself—that means not trading it in to a dealership. Sites like Craigslist or Facebook Marketplace are the way to go to get your car sold quickly.

If the car you’re underwater on is your only vehicle, find a super cheap replacement you can pay cash for and drive temporarily while you save money to buy a better car down the road.

3. Work your plan (and do it fast).

You’ve planned your work. Now it’s time to work your plan.

But this isn’t something that needs to take years. No, we’re talking months here. It’s time to buckle down, clean this mess up and get out of debt.

That means, if you’re saving up cash to pay off your car loan without borrowing money from someone else, you need to cut as much spending as possible out of your budget so you can fast-track your savings goal and get rid of the loan for good. And if you’re getting a personal loan, you need to do the exact same thing so you can pay it off ASAP.

The truth about debt is that it’s not something to play around with. It steals from your future by sending huge chunks of your income—your biggest wealth-building tool—out the door every month in payments. And when you owe people money, it’s pretty much impossible to get ahead. Sometimes, it can even be scary—especially if your debt is causing you to be one of the 78% of American workers who live paycheck to paycheck.1

So, it’s time to get mad. Get on a written budget, and stop spending money on anything you don’t have to. This isn’t the time to go on vacations, eat out or buy a new TV—you’re underwater on a car loan and you’re sick of it! Every extra dollar you can find in your life needs to go toward fixing that.

Here are a few other ways you can pile up cash quick to get rid of your loan:

  • Cut your grocery bill in half (and save the rest). That’s right, your new favorite meal is beans and rice.
  • Pause retirement investing. Investing for retirement is really important. But when you’re paying off debt, that needs to be your priority. It’s okay to temporarily pause your retirement savings while you work on getting out from underneath your car loan (or any other nonmortgage debt).
  • Sell your stuff. We’ve all got so much crap we don’t even use. Start looking around the house and finding stuff you can sell online. Put the dog on eBay or the cat on Craigslist if you have to. (Okay, don’t do that—but do get serious about bringing in extra cash.) 
  • Get to work. Get a second job or a side hustle and start working your tail off to put every last penny toward the difference of the loan. Deliver pizzas. Drive for Uber. Tutor students. Babysit. Whatever it takes!

It’ll be hard work, but remember: It’s only for a season. And once you finish paying off your debt, you can go back to eating at restaurants and taking beach trips.

Plus, that upside-down car loan will be gone forever! Think about how that would feel—pretty incredible, right? So, get to work! You’ve got this.

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How Do You Get Upside Down on a Car Loan?

As you start to work your plan to get out of your upside-down car loan, you may be thinking to yourself, How did I wind up in this spot to begin with? Great question! Let’s take a look at some of the main reasons people end up with an upside-down loan.

Your down payment was too small. 

Saving for a car takes a lot of time, and not everyone has the patience or endurance to save up the cash they need to make that big of a purchase. So plenty of folks make a minimal down payment on a car and get a loan for the rest. But that’s a bad idea, and it’s a big reason why so many car loans wind up upside down.

Think about it: A lower down payment means a bigger loan, and a bigger loan means owing more money on your car. And the more money you owe on your car, the greater the chance that the amount you owe will end up being greater than the value of the car down the road as it depreciates—especially if you’re only making the minimum payments the whole time.

So, if you made a small down payment when you bought your car, there’s a good chance that’s why your loan is underwater.

Your loan has a high interest rate. 

Even if you made a halfway decent down payment on your car, you could still wind up owing more than it’s worth thanks to a high interest rate. The average rate for a new car loan is 5.16%, but that number can go way up if you have a low credit score or you finance a used car.2 In fact, if you finance a used car with a credit score between 620–659, you’ll get a 10.33% interest rate on average.3 Holy smokes!

With an interest rate that high, you won’t make much progress on paying back the full loan if you’re only making minimum payments. And more than likely, your car’s value will shrink faster than the balance of your loan.

That’s a surefire recipe for an upside-down car loan (and it’s why you should always pay cash when you buy a car).

You got ripped off by a dealer.

There are plenty of terrific car dealers and salespeople with high levels of integrity out there. Unfortunately, there are also plenty of bad eggs.

The third reason people wind up with an upside-down car loan is that they bought their car from one of those bad eggs, and the bad egg gave them a horrendous deal.

Let’s say a slimy dealer sweet-talked you into paying $30,000 for a car that’s only worth $23,000. Even if you made a $6,000 down payment, you’d have an upside-down loan before even walking out of the building! And with each day that passed, the value of your car would decrease and your loan would sink further and further underwater.

If this is what happened to you, don’t feel bad—lots of folks get ripped off by dealers. To make sure it doesn’t happen again, we have a list of good questions to ask when buying a car.

Take Control of Your Money With Financial Peace University

Finding yourself upside down on a car loan is no fun, and it can be a real mess to clean up. But there’s one silver lining: It’s a great learning experience. Chances are, if you’ve been through the pain of getting beaten up by a car loan, you’ll never go anywhere near one again.

But how exactly do you buy a car without a loan? How can you save up enough money to pay cash for a car? And is it possible to live without any kind of debt?

Answering those questions is where Financial Peace University (FPU) comes into play. FPU is our nine-week course that’s helped millions of people learn how to budget, avoid debt, save for emergencies and build wealth. It’s perfect for anyone looking to get back on track with their finances or learn from their money mistakes.

If that’s you, what are you waiting for?

Join an FPU class today!

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Ramsey Solutions

About the author

Ramsey

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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