By Eve Chen () - July 9, 2019
First, a definition. What does the phrase “upside-down” or “underwater” actually mean when it comes to a car loan? The problem arises when the borrower owes more money on their loan than the car is actually worth. For example, if you have an accident and your car can’t be repaired, it may be worth close to nothing, but you may still have thousands of dollars left to pay your lender even after insurance pays your claim.
This scenario can happen even without a catastrophic event like an accident. Say you are moving to a new city where you don’t need a car and need to sell yours to help pay for moving expenses. Even if your car is fairly new and in excellent shape, you may not be able to sell it for enough money to pay off what you owe. New cars depreciate—or lose value—quickly, and in every case, you will still need to pay the lender back what you owe, regardless of how much it’s worth today.
Don’t forget that your car is an asset just like anything else you own, and its value is affected by market conditions. If your car is no longer as popular—perhaps because a newer model has been released or it has received some negative publicity—it will fall in value, regardless of the amount you still owe. The value might also decline faster than your loan balance declines if the car has higher mileage or is in poorer condition than average. Also, keep in mind that the portion of the loan that covers financing fees and add-ons are nearly impossible to recoup even when reselling the most desirable car out there.
You may be tempted to get out of your loan by trading in your car for another. Your dealer can present an attractive option: rolling the amount you owe on your old car into financing for the new one. Since the dealer is in the business of selling cars, they are motivated to get your new sale and trade-in, even if it puts you even further under water by combining your debt.
You are much better off refinancing your car through a company like RefiJet, which can vet your application through its wide network of lending partners to get you the best possible deal for which you qualify. This is especially true if financial markets have changed or your personal financial situation has improved, which may help to qualify you for a lower rate or monthly payment.
When you refinance, you have the option of paying off some principle so you can get to the point where you’re no longer upside down. If you do decide to refinance, it’s a great time to consider adding GAP coverage, which pays the difference between what you owe and what the vehicle is worth in the event it is stolen or totaled.
With the help of a refinancing package and some diligent financial decisions, you can eventually put your upside-down status behind you and start on a fresh path toward better financial health. Your future self will thank you.