Are you underwater on your car loan and don't know what to do?
Being "underwater" on your car loan means you owe more than what the car is worth. So even if you sold the car at maximum value, you'd still be at a deficit. For example, if you owe $10,000 on a car worth $8,000, then you would be "underwater" by $2,000.
Owing more on your car than what it's worth can be discouraging. But you do have options. And if you are in this predicament, you're not alone - according to automotive website Edmunds.com, over one in four trade-in car sales involved an owner who still owed money on the car.
This article will discuss three things you can do to help get you out from under your car loan.
1. Make Bigger Car Payments
Getting out from under your car loan "will happen quicker if you're able to make additional payments or pay more than the amount due each month," says Jack Curtis, vice president of consumer lending at Generations Federal Credit Union.
Paying off your old car as quickly as possible is one of the best ways to get out from under your car loan. You can do this by making larger monthly payments if you can afford them, or sell off some other valuables and put that money toward the principal of your loan. Just be aware that you may have to pay an exit fee which penalizes you for paying off your loan early. Double-check your loan agreement to see if this fee applies to you.
Paying off your car loan in this way takes grit and thrift, but it might be your best option in the long run.
2. Refinance Your Car Loan
If you have good credit and made your car payments on time, you may be able to refinance your loan for a lower interest rate. If you continued to pay the same monthly amount as you did before refinancing, you may save money on interest over the term of the loan.
With this option, you don't need to make any wholesale lifestyle changes, and you can pay your loan off incrementally until it's no longer underwater.
You could also refinance for a shorter loan term. Your loan payments would certainly increase, so you'll need to be able to afford the new option. The upside is that you'll be able to pay the loan off quicker.
3. Increase Your Monthly Income
You may need to boost your income if you want to get out from under your car loan. This could mean pressing for a promotion at work, picking up odd jobs or getting a part-time job in the evenings.
While working more may not be ideal, taking on a second job for even three to six months will likely generate enough income to pay down your car loan.
Another option is to use your vehicle as a source of income by becoming a rideshare driver for a company such as Lyft or Uber. Lyft claims drivers can make $35 per hour on average, while Uber claims their drivers make around $25 per hour. It's easy to sign up online, and the requirements aren't very stringent.
For example, to be an Uber driver, you need to be 21 years old with a clean driving record, pass a background check, own a vehicle, and have a smartphone. You also get to set your own hours. This makes it an ideal option if you're busy with other work, school and/or family obligations.
This article presents several options for how to deal with a car loan that's underwater. Making bigger payments, refinancing the loan, and/or increasing your monthly income are all viable ways to get out from under that loan.
There are also ways to avoid this situation from happening again. You can pay more upfront with a larger down payment, or negotiate more favorable loan terms before your purchase your new car. "Research the different types of automobiles you want to purchase to find out historical data on depreciation, cost, and expected monthly payments," says Paul Matamoros, vice president of auto lending at Texas Trust Credit Union.
Getting out from under your car loan, and keeping your new car loan above water, are both important steps toward financial independence.
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