In this case you are $2,000 upside down on your car loan.  In this case, if you were to sell your car you will still owe the car dealership $2,000. This is why you have to be careful with the type of car you buy. Some cars like Toyota Camry and Honda have very good resell value

Solutions to Upside Down Car Loan

A Money Magazine report indicated that about 30 percent of current car buyers are upside down on their current auto loan. In many cases car dealers trick buyers with poor credit, bad credit or little credit into taking loans with stipulations that are not in the buyers interest.

When you are upside down on your car loan there is not much you can do to rectify the problem. If you feel that you were not treated fairly or with financial integrity by the car dealer you can contact your state Consumer Affairs office for legal solutions.

When you are upside down the unfortunate reality is that you will have to continue making payments on the vehicle until you have paid it off. Selling will not solve the problem as you will still owe the difference between the selling prices and the upside down amount.

One possible solution is to trade in your vehicle for one that is much less in value. Select a second hand vehicle that is reliable and have good re sale value. So, hang in there, service you car as required and keep paying of the loan so that it does not harm you credit. The faster the better.

Another alternative is refinancing. If you could locate a bank or car dealership that would be willing to refinance the car at a lower interest rate this would help in reducing payments amount and get you out of the upside down situation. You may have to incur a early payment penalty, but that is usually small compare to the upside down amount. Fortunately, in many cases, dealers also give incentives for early payment as well.

The final decision you could make is to allow the car dealership or bank to repossess the car, but that could lower you credit score and make things difficult for you to obtain a new loan in the future.

Preventing an upside down car loan

In this financing credit environment you should be meticulous in preventing from being in an upside down car loan situation. Here are some tips to avoid falling into this trap.

First, ensure that you credit is in good health. Get a free credit report from annualcreditreport.com. Pay your bills on time and ensure that everything on your credit report is accurate. Try to save a little and put at least 10 percent down on your car loan, 20% would be ideal.  This will give you negotiating power and may help to reduce your interest rate.

Determine the true value of the vehicle by studying the Kelly Blue Book or NADA guide.

Avoid car dealership offer of extra low monthly payment. This will only let you pay for the car for a longer period of time and could result in higher interest rate.Opt in for a higher monthly payment, short financing term with lower interest.

Do not apply for  auto loan, specially on an old car for more than four (4) years. Do not take a 60 to 72 months used car loan.

It is advisable that you buy a used car instead. New cars loss about 20% of their value from the time of leaving the dealership. A reliable used car is the best option. Even the best selling book “Rich Dad, Poor Dad” advises even the very rich to purchase a used car.

Most new vehicles loss about 30% to 40% of their value in a couple years. By opting to purchase used automobile you have allowed the dealership to incurred the cost of the depreciation over the first couple years

There are some car dealers with Buy Here Pay Here financing that will only approve you for a loan only if you have an auto loan in your credit history. Many car buyers with bad credit have indicated that car dealer will charge you a higher interest rate of APR, sometimes as much as 15%.

The car sales man could tell you that your credit rating or FICO score is 450 when it is actually 600. They sometimes point out that the bank requires car buyers to purchase warranty, credit life insurance and may include requirements in the fine print that could cost you more money.

In some cases dealers have lied to bad credit car buyers saying that their auto loan application was rejected because their credit score was too low and invite you to find a co-signer for the loan, which now gives them access to two customers instead of one. Because you may have done to auto dealer after auto dealers and you have been turned down, your self esteem may have gotten a little down and the dealer manipulates you into signing an agreement that could bring untold havoc to you financial situation.

This agreements of contracts could lead you to become upside down on your bad credit car loan and force you deeper into an unwanted debt with high interest rate, and high monthly payments.

This high payments may force you to miss paying on time and the dealer now have the option of increasing your payments via extra fees such as late payment fees or repossess the car.

So, you have to be very careful. There are even cases where banks and other lenders have called bad credit car buyers telling them that the dealer did not pay down on the trade in vehicle.

Apply to Many Lenders with One Car Loan Application

Whether you credit is good or bad, the best thing to do is get pre-approved for your car loan first. Then you can go to the dealership with negotiating power. Too many times people with bad credit believe that they have no alternative.

There are many banks and financing institutions that are willing to help people with bad credit get a vehicle. Try applying online where you can get a car loan quote from multiple car financing lenders for free.

By doing it online your application is sent beyond you local car dealer to a wide network of lenders that are willing to help. If you spread you net, the greater the possibility of get a good deal.

Take for instance that you would like a loan for a Honda Civic, but you local car dealership does not have one, then by doing it online you can get an incredible deal from another dealership and lender around the nation.

However, in most cases you are required that you have a job and that your monthly income is at least $1,200

Why Bad Credit Car Buyers Get Bad Deals

Someone once said that ignorance is bliss. In this case inadequate information, ignorance, too much debt coupled with a low credit score or no credit history help to put bad credit car buyers in a deeper hole.

Many times the loan offered by the car dealers 48 to 84 months loan with low monthly payments but high interest. By the time you are half way through paying the car, it is already old and needs regular repairs, and you need to repurchase another.

So you trade in the old for a new and you find yourself being upside down on your car note. low monthly payment is sometimes a trap. Focus on the total prices of the car, not on the monthly payments.

How to prepare for a car loan

If you credit is good, say, above 700, it is likely that you will get a car loan with low interest as low as 5%, but it you credit is bad that could increase to as much as 15%. First, get a credit report from all three credit report agencies: Experian, Equifax and Transunion – 3-in-1 credit score Now!.

Look for discrepancies within your credit report. Try to repair your credit report by paying of your current debt, paying your monthly bills on time, reducing the number of credit cards you hold to about 3 and reduce the amount times you credit report is retrieve by loan institutions.

If done well, you could bring your FICO score up to 700 within a six months period.

When you have fixed you credit get pre-approved before visiting the car dealership. Never sign a car loan with financing extended warranties and bogus insurances. Read the fine print before you sign anything

Very important: if you have bad credit please do not buy a car, particularly a new car right now. Work diligently to repair your credit so that you can be credit worthy in a few months. Stay away from credit programs that advertise fixing credit overnight.

If you pay your bills on time and reduce the amount of debt you owe, you can increase your FICO score in matter of months. Trying bringing you credit score to above 600, event 700. Try putting 15 to 20 % down.

If you spend some months reducing debt load and increasing your savings you will be able to put away the 20 %. Also, if you are capable of raising the 20 % you might want to consider going to an auction as an alternative. You can get a car for 50% below the car value at auctions.

Try anything to not to be upside down on a loan.  Also, with 20% down you are more likely to get a bad credit car loan.

How to Maintain Your Credit Score

First, get a free credit report at least every 3 months. This will have no affect you credit rating. Please stay away from applying for credit through the loan application and retail credit card deal as these can have a negative effect on you FICO score.

You should get you credit score before going to the dealer because in some cases dealers lie about credit scores. If they report a discrepancy on you credit, you can confront the dealer and even use this as leverage.

Get your credit from the 3 credit bureau so that you can have 3-in-1 credit score Now!

Have you ever had experiences with Car dealers?  Tell us about it.

Pay out extra cash each month:

If you have already taken up an upside down loan, then one way out is shelling out extra amount right from the beginning of taking the loan itself. The extra amount you will pay each month towards the car you have purchased will help to reduce the level of negative equity. The extra amount you will shell out every month, right from the initial stages will make a huge difference in the long run.

Try to get the car insured:

A gap insurance obtained for the car can surely be of great help. If luck is not in your favor and you get into a bad accident where the car is a total loss, then you will end up paying the difference amount. According to the expertise unveiled at Car Down Loan, what the insurance company will do, is pay out to the car dealer or loan company, only what they deem the car is actually worth. And if the money you owe on the vehicle is more, then the finance company itself will follow up with you for the rest of the amount. The gap insurance obtained helps you in paying off the difference amounts. You are saved from the headache if your luck has been bad for you.
Buying a new car is always an attraction.

It is very easy to get bored of the old car, when there are better cars available in the market. But it is often better to retain the old car, if you have a negative equity. Until the negative equity is paid off, it is better to keep the car and then later it can be traded to a new car. It should be noted that when this is done, you negative equity on the old car will be attached to the loan on the new car. Monthly installments that you will pay, as well as the purchase price of the car, gets inflated due to this according to cars.com.

One of the best ways is to get rid of the car yourself, if you have an upside down car loan. A classified placed in the newspaper helps you to sell off your car for the exact amount that you owe on the loan. A buyer willing to buy the car is also a safe bet. While taking the next loan you can shorten the term of the loan, which will of course increase the amount of the installments that you will pay on a monthly basis. But whatever the case, at least you are able to get rid of the upside down car loan and get rid off the negative equity on the loan.

First, if the consumer could not meet the monthly debt service of a loan, ideally, he might be able to sell the asset collateralizing the debt and pay off the loan. If an asset depreciated too quickly, however, or if the term of the loan is too long (it is not uncommon to see auto lenders making seven-year loans in an attempt to create lower and more manageable monthly payments), the asset may depreciate to a value below the loan payoff.

This is referred to as being “upside-down” on a loan. The problem is that if the car had to be sold to eliminate the monthly payment in an attempt to make ends meet, and the value of the car is less than the amount of the loan payoff, the consumer would have to come up with additional (and perhaps substantial) money just to sell the car.

Chances are that if the owner is selling the car because they are financially strapped, they do not have the extra money needed to pay off the loan. This is obviously trouble, and the scenario unfolds surprisingly frequently: 40 percent of new car buyers owe more on their trade-in than the trade-in is worth (source: bankrate.com)

The second and most important reason that auto debt is not ideal is that it tends to siphon too much money away from an individual’s long-term savings plan. Let’s look at an example

Suppose Mike, age 35, drives a five-year-old used car, namely a fully-paid-for 2003 vehicle. The car is worth about $13,000 and has 60,000 miles on it. Suppose Mike trades in his 2003 for a new 2008 car for $30,000. He finances $17,000 ($30,000 for the new car minus $13,000 for the value of his trade-in) for five years at 6 percent. His monthly payment is about $325. So far, so good.

Mike is driving a beautiful new car with that wonderful new car smell. At the end of the five-year period, Mike once again owns the car free and clear. Once again, however, he is now the owner of a five-year-old car worth perhaps $15,000.

Now, let’s suppose that Mike did not buy the new 2008 car and instead decided to drive his 2003 car for five more years. And, rather than plunking down the $325 a month toward his would-be car payment, he instead invested the $325 a month into his Roth IRA for the five-year period. If Mike never added to the Roth IRA again, and the five years of would-be car payments were to compound at 9 percent, what would the value of his Roth IRA be at age 65? … $211,265.

All of the sudden that car is looking a little more expensive! Conversely, what would the value of Mike’s 2008 car be in 2038, when Mike turns 65? Probably nothing (keep in mind this is a hypothetical illustration and is not intended to reflect actual performance of any particular security).

Maybe that new car is costing Mike more than he realizes, and this is exactly why consumers must be careful when financing a depreciating asset. Not only are they making payments toward an asset that is losing its value, they are not making a payment to an asset that is appreciating. The verdict on auto debt… sometimes necessary, but definitely not ideal.

Submitted article by Jeff Reish, a financial advisor with Raymond James Financial Services, Inc., member FINRA/SIPC, located at 618 Macon Ave. in Cañon City.