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Are You Upside-Down on Your Car Loan?

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.

Consider Refinancing

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.

Refinance or Trade In Your Car?

If your car loan payments have become too difficult for you—perhaps because of a change in your income, marital status or housing situation—maybe it’s time to make some decisions. No one wants to live under constant financial strain, nor should they have to. Many choices in life are nearly impossible to undo—but not this one. So let’s take a look at your options.

First, do some digging to help define the problem by asking yourself some simple questions. Based on these answers, you can decide whether to cut bait and make a complete change or stick with your car and refinance.

  • Do I like my car?
  • What type of condition is it in?
  • Is it a reasonable car to have in my situation?
  • If my payments were more affordable, would I keep it?

Say you are a full-time employee who has decided to quit working and pursue a graduate degree. If your car is practical, gets good gas mileage and requires few repairs, and you will need a car for school, it may be a good idea to keep the car and seek refinancing to make it more affordable. A decision to refinance can often work to your advantage, especially if you have made improvements to your credit. Even if your credit is about the same, you can still benefit by stretching out your payment schedule to make your payments more affordable.

On the other hand, if your car is pricey and loaded with extras—clearly more than you need as a student with no income—it’s probably a great time to consider a trade-in. Through a trade-in, you can choose a more economical car with lower payments, and also transfer the equity you have built in your pricey car toward your new car. Both of these steps will help reduce your payments to a more affordable level.

Do Your Research

Regardless of which path you choose, you will need to do your research. If you decide to trade in your car for a lower-priced car, you’ll want to make sure that you are getting a fair deal for your trade-in. It’s a well-known fact that if you trade in your car to a dealer, you will get a lower price than if you sell it yourself to a private party. After all, the dealer is taking your trade-in with two goals in mind: to sell you a new car and sell your old trade-in, both at a profit. At the very least, you owe it to yourself to get onto a site like Kelley Blue Book (kbb.com) to learn what your trade-in is really worth, considering its age and condition, and compare it to the dealer’s offer.

If you think your current car is right for your situation moving forward, you can contact a company like RefiJet, which helps customers get a refinancing deal that is more advantageous. Since we work with so many different lenders, we can often find better loans for people who qualify. The important thing is to realize you have options—there is always another car or financing deal that better fits your circumstances.

Understanding Your Car Loan Agreement

You’ve successfully negotiated the purchase of your new car. Congratulations! Owning a car is a major source of pride and accomplishment for most Americans, and if you live in an area without reliable public transportation—a great convenience too.

Before you can lay claim to that shiny new (or new to you) car, however, there will be paperwork—especially if you are planning to seek financing. Mistakes can happen, and part of the responsibility for avoiding them lies with you. Make sure you understand everything that appears on your loan document, especially your monthly payment amount. Review the details carefully and be sure to ask for clear explanations that make sense to you before signing. Here’s a look at what to expect as part of your contract:

  • Vehicle Identification Number (VIN). Yes, we realize this sounds obvious, but make sure that the car you chose is actually the same one being sold to you. The VIN is the unique identifier for every car, located below the lower left corner of the car’s windshield. Make sure that the number on the contract is identical to the one that appears on the vehicle.
  • State sales tax. Don’t forget about sales tax! The amount will vary from state to state and can even vary city to city. In Colorado, for example, taxes will run at about 11 percent, adding significantly to the price of your car. Fortunately, it can be included in your financing, so you might not feel the impact as much.
  • Vehicle registration fee. The state charges you a fee to register the car and issue your license plates. These can vary depending on the cost of the car you are purchasing, so a pricier car can result in higher fees.
  • Documentation fee. This is the amount the dealer assesses to cover the costs of facilitating the loan. It’s a good idea to review this figure with your finance rep to make sure it passes the “reasonableness” test.  Unlike many dealers and other vendors, RefiJet does not charge customers any fee for their service to facilitate a loan.
  • Loan terms. Review the terms carefully to understand exactly what you will owe. Make sure the interest rate, length of the loan and items included match with what you’ve been promised. Also, check on the rules for prepayment, late fees and other possible penalties.
  • Other charges. Your loan may include costs for extras such as an extended service contract or GAP. Take the time needed to make sure that what appears on the loan contract matches your verbal agreement.

When reviewing your loan contract, don’t let high-pressure sales tactics dissuade you from asking questions! You should be clear on every line item listed and it should all fit together within the context of your discussions with the dealer. Also, keep in mind that it’s always a good idea to have a knowledgeable person with you when it comes to signing on the dotted line.