Getting Out of an Upside Down Car Loan
- By Gary Foreman
A few years ago my credit was in bad shape and I needed a van. The salesman
at the car lot said he could put me in one. I bought it thinking it would
give me a chance to reestablish my credit. They overcharged me for the van.
I owe $16,000 but the van is only worth $8,000. I want to get rid of it but
don't know what to do. I'm upset with myself that I let myself get taken in
like that. I want to go public about the dealerships hurting people with
credit problems, but I'm ashamed that I was used. What can I do about this
Patty is in a pretty deep hole. But she does have plenty of
company. A Money Magazine survey showed that nearly 30% of new car shoppers were
upside down in their current car loans. And, yes, Patty's right that some car
lots take advantage of buyers with poor credit.
Let's try to do two things. First, see what options Patty has
available to her now. Then we'll look at what she can do to avoid similar
problems in future deals.
There's probably little that Patty can do from a legal
standpoint. She can check with State Consumer Affairs office. If she has any
legal recourse they'll tell her.
Patty needs to decide why she wants to get rid of the van. The
unfortunate truth is that she may need to keep it for awhile until the payoff is
closer to the value of the van.
If she's having trouble making the payments, selling the van
won't help. She would still owe the lender $8,000 after the van is sold.
Trading for a different car isn't likely to help either. She'll
owe more on the new car than it's worth. So she'll be upside down in that car,
too. And will remain that way for quite awhile. Especially if she tries to get
lower monthly payments.
So unless she plans on trading for a car that's worth much less
than her van that won't solve the problem.
The best way to get out from under an upside down loan is to
keep the car as long as possible. The longer she hangs on to it, the closer the
value of the van is to the amount owed. If she keeps it until the loan is paid
off she'll know for sure that she owns more than she owes.
Refinancing could reduce her payments. Before she starts
shopping for a new loan she should check to find out whether she can pay off the
existing loan early. And whether an early payoff is penalized. Also ask if the
lender will renegotiate the loan.
If she can pay it off early, she'll want to know what interest
is being charged on her current loan. Then she can shop for a cheaper rate or
Get a copy of your credit report before you start shopping.
(Equifax, PO Box 740241, Atlanta GA 30374-0241; 800-685-1111) Show potential
lenders the report. Do not let all of them request your credit score. That will
tend to lower it.
The worst choice would be to let them repossess the van. The van
would be sold at auction. The sale price will not cover the amount owed. Patty
will still owe the difference.
Now that we've outlined Patty's options, what can she do to
avoid being taken again?
Car deals are complicated. It's always easier to understand
what's going on if you break things down into smaller, simpler pieces.
You're actually handling three separate transactions. First,
you're buying a vehicle. Second, you're buying a financing package. Third, a
trade-in means that you're selling a car.
Perhaps Patty didn't overpay as much as she thinks. It's
possible that the car lot gave her a better interest rate than she deserved but
made up for that by charging more for the car. Unless she separately negotiated
the van's price and then the financing, it's pretty hard to tell.
When you have bad credit and need a car you're at a distinct
disadvantage. Walking into a car lot is the worst way to get new wheels. The
first thing that Patty should have done is to find financing.
After you've found a loan, then find out the price of the car
that you're considering and the value of your trade-in. There are magazines and
websites that will provide new and used car prices.
Finally, don't finance a car for longer than you expect to own
it. The longer the car loan, the more likely you are to be upside down in the
Gary Foreman is a former financial planner who currently edits The
Dollar Stretcher website <TheDollarStretcher.com>
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