What Are Your Options If You’re Upside Down on Your Auto Loan
Being upside down (or underwater) on an auto loan means you owe more on your vehicle than it is currently worth. This situation is common and can happen even when payments are made on time.
Vehicle depreciation is steep in the early years of ownership, especially for new cars, trucks, and SUVs. Long loan terms or small down payments can widen the gap between the loan balance and the car’s value.
Car owners who feel stuck in an upside-down car loan often have more than one path forward. Which option makes the most sense depends on factors such as income, other debts, the age and condition of the vehicle, and long-term financial goals.
Why Vehicles Often Become Upside Down
Most vehicles, especially new vehicles, lose value quickly after purchase. In the first few years, depreciation usually outpaces how fast loan balances decline. This effect is more pronounced when loans are stretched over longer terms or when little money is put down at purchase.
Rolling negative equity from a previous vehicle into a new loan can also create an upside-down position from the start.
None of these situations mean a borrower made a reckless decision. It’s just the way auto loans and vehicle values typically work.
Options for Upside-Down Auto Loans
1. Keep the Vehicle and Stay the Course
One option is to continue making payments as agreed and keep the vehicle. Over time, loan balances fall while depreciation slows, which gradually narrows the gap.
This approach often works well when the payment fits comfortably within your budget and the vehicle is reliable. This is often the preferred choice if you’ve only had the vehicle for a year or two and there’s no pressing need to find a replacement fast.
2. Make Extra Payments to Close the Gap
Some borrowers choose to make extra payments toward the loan principal. Even small additional amounts can reduce the balance faster and lower the total interest paid over the life of the loan.
Extra payments do not have to be all-or-nothing. Some people add a little to each monthly payment, while others make occasional lump-sum payments when cash allows.
The strategy can potentially do more harm than good if you neglect higher interest debts to pay down your auto loan more quickly. But in thoughtful moderation, it can be an effective way to get above water.
3. Refinancing to Get Out From Underwater Faster
Refinancing does not automatically solve being upside down. In many cases, extending a loan term keeps you underwater longer.
However, if you can make a higher monthly payment work with your budget, refinancing into a shorter loan term can help you get above water more quickly. Shorter terms apply more of each payment to the loan balance, which may allow your payments to outpace depreciation and create a clearer timeline for regaining equity.
This approach does require stable income and room in your budget to handle a larger auto payment each month.
4. Trade In While Still Underwater
Trading in a vehicle with negative equity means the remaining loan balance is typically rolled into the new loan. This increases the amount financed and can lead to higher payments or longer loan terms.
In some situations, trading a newer, higher-cost vehicle for a significantly less expensive pre-owned vehicle that has already gone through its steepest depreciation may slow future value loss. While the prior loan balance is still carried forward, slower depreciation can allow equity to recover more quickly than staying in a newer, more expensive vehicle.
Understanding how much negative equity is being rolled into the new loan, and how the new vehicle is likely to depreciate over the term of the new car loan, is critical before choosing this path.
How Personal Factors Shape the Right Choice
Income stability is vital, because the most dependable way to get out from being underwater is paying more each month.
A higher payment that feels manageable today may not stay that way if your income changes or unexpected costs pop up in the near future, like medical expenses or emergency home repairs.
Vehicle condition is another factor to consider before choosing an approach. If the car has many years of reliable use left, it may be best to stay the course or make extra payments without selling or trading it in.
Being Underwater on an Auto Loan Might Look More Serious Than It Actually Is
Being upside down on an auto loan is very common, particularly in the first few years of ownership. For many borrowers, it is simply a phase of ownership rather than a financial emergency.
The key is understanding how your loan balance and your vehicle’s value change over time and choosing a path that fits your budget and priorities.
Monroe-area car owners who have concerns and want to review their auto loan options or explore refinancing can call Ouachita Valley Federal Credit Union at 318.387.4592. Our lending professionals can help you evaluate your options with clear, practical guidance.
