Have an Upside Down Car Loan? How to Sell a Car When You Owe More Than it’s Worth
We hear it all the time: A new car buyer is in an upside down car loan. But what does that mean? What are the ramifications? And if you want to trade or sell your car, what are your options?
Since new cars depreciate faster than used cars, typically about 20% the first year and as much as 60% within 5 years, buyers can owe more on a car than it is worth. If you have buyers remorse or for some other reason decide you can’t keep your car, you’ll likely end up losing money on the deal.
But, it can be less painful than you might think. Here is what you need to know about selling a car when you owe more than it is worth, or, in an upside down car loan.
This story is 100% human researched and written based on actual first-person knowledge, extensive experience and expertise on the subject of cars and trucks. No AI was used.
Know How Much You Owe on an Upside Down Car Loan
The first thing is to know all the numbers: Payoff amount, any pre-payment penalties, interest due, return fees and anything else that might be added to a payoff. Contact the lender or lien holder for an accurate picture of everything that will be due in order to sell the car and release the lien.
Read: When “Gently Owned” is as Good as “NWT:” Used Luxury Cars Under $30,000
Know Your Car’s Value
This is always one of the first things that should be done before selling or trading in a car. There are several resources to look at: search the trade-in value at Kelley Blue Book or Edmunds; the NADA also has a good car-value calculator. Getting a trade-in offer at Carvana or CarMax can be a good idea, too; they will evaluate the car and give a firm offer with an expiration date.
Read: We Tried Them All — Carvana, Vroom, TrueCar, CarMax to Buy a Used Car
Is it Worth Holding On For a Bit Longer?
If tipping the scale on loan vs. car value or releasing a lien is in sight, usually about two years from the time of purchase for a new car, it may be worth waiting it out. The options for getting out of an upside down car loan can leave you more vulnerable than if you have the upper hand on the financial transaction.
To determine this, look at your payment schedule for an idea of how much principle you’ll owe and compare it to the depreciation schedule for your car. If will soon owe less than the car is worth, it could be worth holding on until you are equity-positive on your car loan. This will give you more negotiating power when it comes to selling or trading in your car.
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Consider Refinancing Your Car
If you’re OK with the car but not so much with the payments, look at refinancing. Even though interest rates have been declining, some finance rates can be sky-high while others are reasonable. The bigger impact is your credit score.
A hard look at your credit report may show some things that can be addressed that will allow you to qualify for a lower interest rate. Again, know the payoff details on your current loan to be sure you’ll end up in positive territory.
And then, shop loans. Some car dealers have access to great loans on certain cars. Credit unions and other lenders may also be able to offer better terms than your current loan, and a refinance can often also pay off a lien, such as one generated by a mechanic or a judgement.
Sell Your Car to Someone Who Will Pay Off the Loan or Lien
If the best option is to sell the car, the buyer may be able to pay off the loan or lien for you. Car dealers do this all the time, both with a rollover loan in which the seller’s liens are paid off and the amount is added to the price of a new car, or by paying off the lien and paying you the difference.
It’s important to look at the details and the offering; it’s possible to end up in a better position if, for instance, a car dealer is offering a super low interest rate on a new car or you can buy a car with a much lower price than the one you’re trading in. Also consider the trade-in value of the car you’re selling and make sure that you’re getting a fair deal on it.
Be sure to be familiar with all the obligations of your current loan or lien so you can accurately assess the benefit, or not, of a rollover or trade.
Get a Lien Release Letter From Your Lender
Once your lien or loan is paid off, get a lien release letter. This should be automatic but not always; this letter will prove that you fully satisfied the lien or loan. Make sure you see it on your credit report, too; the last thing you want is an old lien following you to your next big purchase.
Negotiate your New Car Separately From Your Financing, Including a Lien Rollover
It is so lucrative, and seems easy, to have the full conversation with a car dealership: they buy your car, pay off your loan and roll you into a new purchase at a great rate. But, a lot of little details can get lost or worse, add up to an expensive mistake. Make sure a new car purchase decision is made separately from the finance deal, which is where the lien payoff will happen.
Gap Insurance Can Protect Your Upside Down Car Loan in a Crash or Theft
Gap insurance is a policy that will pay the difference between the loan amount and the repair or replacement value if your car is damaged or stolen. Comparison shop for this; your car insurance provider sells gap insurance, as does the car dealer, which may not offer the same rate or even the same coverage. It’s important to review the offers carefully.
Talk To a Lender You Trust Before Doing Anything
This might be the most important step: Talk to someone you trust. Even if your bank doesn’t offer the best finance rate and you end up going with another lender, the dealer or just holding on to your car, you should get a fair and unbiased opinion on the situation and know all your options.
And then, enjoy the feeling of relief. There is nothing so stressful as a taxing financial debt, and getting out of an upside down car loan will allow you to relax and enjoy being debt-free, lien-free or simply, in a stronger financial position.
Categorized:Car Buying
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