Upside Down Car Loans: Consider Refinancing
What Can You Do About Your Upside-Down Car Loan?
If you put ten people who have bought a new car in the last couple years in a room, chances are that four of them are upside-down on their car loans.
An upside-down car loan is the less onerous euphemism for saying that they owe more on their car than they could ever get if they sold it or traded it in. Is this a bad thing? And if you are one of the four upside-downers what, if anything, can you do about it?
Owing more on your car that it is worth is not necessarily a bad thing if you intend to keep the car until it’s paid off, and you have the auto insurance coverage to satisfy the loan if the car gets totaled in an accident. Doing nothing is always an option.
If you are looking to replace the car then you have to do something to close the gap in the unpaid balance of your current loan and the car’s resale value, or be prepared to eat the difference and go even deeper upside-down on your next car purchase.
Some new car lenders will add the amount of the unpaid principal on your old loan to the principal amount on your new car loan. In effect you would be paying that much more for your new car, or still paying for the old car you no longer own, which ever way you want to look at it. Do that a couple times and you’ve paid for somebody else’s Hawaii vacation.
If your current car loan contract doesn’t have a prepayment penalty, you can refinance your current car loan. Refinancing home mortgages to get a better APR is a national pastime but not nearly as many people have done the same with the second most expensive thing they own. Interest rates change all the time and it may be worthwhile to investigate this route. Even if you refinanced at the same rate for a shorter term, your monthly payment would be higher, but you would get out of the negative equity situation faster too.
Pay your current lender extra every month. This can close the gap in a hurry but only if your lender has agreed ahead of time that all the extra money you send will go to paying down the principal balance on the loan. If you just add something extra to your loan payment without working it out first, the lender will most likely just credit the extra toward a future payment. There is no advantage to you paying extra unless the principal portion of your car loan is being reduced proportionately.
Pay off the car loan with a real estate equity loan or a loan from another source. The main advantage to this approach is that you go instantly from upside-down on the car to 100% ownership. You can now sell the car yourself to raise cash for a substantial down payment, or you can trade it in toward the new car.
Car loan amortizations are set up so that the money from most of your early payments goes almost entirely to the interest portion of the loan. During the first two years of the loan, the resale value of the car plummets while the principal portion of the loan barely budges. The sooner in the loan cycle you address your upside-down loan the better off you will be.
(c) 2006 by Peter Boston. Peter is an attorney, writer, and the editor of the www.profacere.com website, a tips and resource site for car loans, credit cards, improved credit scores, and consumer credit information, updated daily on the Profacere Blog.
How to Refinance An Upside Down Car Loan
An estimated 30% of new car owners have upside down car loans – loans where one owes more than what the car is valued at. However, even used car owners can have this problem. While refinancing won’t solve all your problems, it can help make your payments more manageable.
Start by checking out your current loan rates and terms. Then you can compare car loan lenders to see what deals you can find. After that, it is just a matter of picking terms and doing the paperwork.
Check Your Current Loan Rates And Terms
It is a good idea to look at your current car’s loan rates and terms to see what you have. This will give you a target rate that you want to fall under. Also, check to see if there are any early payment fees.
Besides looking at your rates, figure how long you have left on your auto loan. You can select a new loan with approximately the same pay off date or extend the terms for a lower monthly payment.
Compare Car Loan Lenders
Finding the best refinance offer is a matter of searching for the right lender. Luckily, you can use the internet to save yourself some time. Using a broker site will let you collect rate quotes in minutes. Or you can go to individual financing company sites and look at their rates.
Either way, you want to compare their APR. That way you won’t get caught paying high fees for a low rate.
Pick Better Terms
While you are searching for rates, also plan on picking better loan terms for your budget. Selecting a loan for the same period you have left on your old loan will keep you on track for the pay off date. It will also help you get out of the upside down loan situation sooner.
However, a longer loan of five to seven years will lower your monthly payments immediately. The tradeoff is that your interest costs will be higher.
No matter what type of loan terms you choose, don’t hesitate to start your loan paperwork once you have selected the right lender. Quotes aren’t locked in until you start signing paperwork. The sooner you refinance, the more money you can start saving on your monthly payment.
See my recommended Auto Refinance Lenders online for the lowest rates possible.
Carrie Reeder is the owner of ABC Loan Guide, which offers help with low rate car finance.
Best Auto Loan - Tips for Avoiding an Upside Down Loan
If you are new to the car buying process, the likelihood of acquiring a bad auto loan is high. For this matter, car buyers must familiarize themselves with how the financing process works. A common problem that arises with buying a car is obtaining an upside down loan. This occurs when the amount owed on the vehicle is significantly higher than it's worth. Fortunately, there are techniques to avoid this sort of loan.
Purchase Vehicle with a Down Payment
Car values depreciate. This is inevitable. On the other hand, some vehicles are subjected to rapid depreciation, which means that the car buyer will always owe more than the vehicle's worth.
If planning on keeping a car until the loan is completely paid off, a rapid depreciation is little cause for concern. However, if you enjoy trading-in or buying a new vehicle every two to three years, you may acquire thousands of dollars in negative equity.
One tactic for combating rapid depreciation is purchasing the car with a down payment. Typical down payment amounts are about 10% of the vehicle's price. However, if you can afford a large down payment - perhaps 20% or more - this will help avoid an upside down loan.
Acquire Reasonable Loan Terms
The average length of a car loan is five years or 60 months. Nonetheless, some dealerships and finance companies will stretch out the loan for 72 or 84 months. A longer term means lower payments. However, it also equals more interests, and you will likely owe more on the vehicle than it's worth. If possible, limit loan terms to 60 months or less. For a list of reputable auto lenders see www.abcloanguide.com.
Buy a Used Automobile
Even though new cars are more appealing and attractive, they lose their value very quickly. In fact, within the first two years, a new vehicle will depreciate by 40%. If the car was purchased without a down payment, and the interest rate on the loan is high, the chance of an upside down loan is great. If possible, choose a used automobile. Used cars also depreciate. However, they hold their value longer than a new car.
Getting Out Of A Car Loan
In some cases a borrower may find that they were overcharged for a car loan, ending up owing more on the loan than the car is actually worth. This is referred to as an upside down car loan. A situation like this can happen when a borrower with bad credit has been taken advantage of by a dealer or lender. Getting out of a car loan like this would be the way to go if possible. To avoid getting in this situation always use a reputable car loan service which will connect you to respectable lenders. Whatever the reason is for needing to get out of a car loan, you must be careful to do it in a way to avoid huge damage to your credit rating. A Car loan can be gotten out of but it will take some work.
Here are some options:
Refinancing car loans
- Decide whether getting out of car loan entirely is necessary. Can you get by with paying $50 - $100 dollars less each month?
- Check if your current loan charges prepayment penalties.
- Refinance a simple interest loan with no prepayment penalties into a simple interest loan with a lower rate.
Negotiate new payment plan with your car loan lender
- Decide what kind of monthly payment you will be able to afford for the duration of your car loan.
- Provide the papers that back up your payment proposal.
- It is best to approach your lender before you miss your payments to avoid repossession. If not you could be stuck with no car, ruined credit and remaining payments.
- Go to your lender and see what they are willing to do rather than repossess your vehicle. Some lenders of car loans in Canada will be willing to tack on missed payments to the end of your loan term as long as future monthly payments can be made on time.
Sell car yourself
Turn your loan over to a friend or family member. Remember the new owner will have to be approved by your lender. Sell your car privately rather than having the dealer repossess and sell it. The dealer will dump it for a low price and you will be left owing the remainder of the loan.
Hand over car to lender as last resort
This will save you the costs of repossession – towing, storage. Negotiate the remainder of the loan. They may allow a more favourable pay off amount. Make every effort not to destroy your credit rating so when your finances improve you can get approved for another car loan!
Sean Patrick is a special finance officer who develops systems and resources to help you succeed with your car loan needs. Find out more about bad credit and bankruptcy car loan assistance with free resource and calculators, available at: http://www.carloanscanada.com
Private Auto Loans For Non Dealership Purchases
Buying a used car directly from an owner will get you a much better deal than you would get from a car dealership. This is especially true in cases where the car owner and the car history are well known to the buyer. It eliminates the possibility of hidden surprises. On the whole, private auto loans have a lot in common with other methods of car financing. However there are also certain differences that can be important when deciding to purchase a car.
Higher Rates For Used Cars
When it comes to used cars, the rates for person-to-person or private auto loans invariably prove to be higher than those for a new car. To take an example, rates for private party sale auto loans from online auto loan lenders will usually be about two points higher compared to what is charged for traditional new auto loans and about one and a half points higher than the interest rate being charged for used car loans for vehicles purchased from dealerships. Moreover, the rates will fluctuate according to your credit history and other aspects concerning your loan application while new car loans from dealerships usually have fixed rates providing you qualify for them.
Repayment Schedules
Loan term may be less than that of a new car. The standard duration for financing a new car can be up to seventy-two months. In the case of private auto loans, it may not be possible to finance a vehicle for the same time period. Usually lenders are ready to finance private auto loans for up to forty-eight months, though there may be exceptions. However, auto loan financing should be done for as short a period of time as you can possibly afford. This is to ensure that you don’t end up in a situation where you owe more on the car than its value (upside down car loan) and to minimize the amount of interests you are required to pay.
Down Payments and Fees
With many lenders a down payment may not be required for person-to-person auto loans. Despite not being required, it is better to put money down. Doing this will reduce your chances of overpaying for your car loan in the future. Taxes, title and registration have to be paid separately when you purchase a new car from a dealership. The dealer normally combines taxes, title and registration fees into the loan amount. For private auto loans, the lender will not allow you to finance the fees and will require you to pay for them out of your pocket.
Title Transferring
On purchasing a new vehicle, the title is put in your name almost immediately. When it comes to person-to-person or private auto loans, it could take longer. The owner of the car you are buying from may still owe money on the car and it could take a week or longer for completing the payoff process. His lender needs to receive the payoff amount before he transfers the title to the car owner and then it can be turned over to you. The duration of this process is mainly based on the location of the lender. For a local bank, this process should not take more than a few days. However if the lender happens to be in another state, it could take much longer for the transfer to be done.
To briefly sum it up, private auto loans make a good option if you are a creditworthy borrower. However if your credit happens to be less than perfect, it may be better to turn to your local dealership as the best source for an auto loan.
Sarah Dinkins is an Expert Loan Consultant at www.Badcreditfinancialexperts.com where she helps people to repair their credit and to get approved for home loans, unsecured personal loans, student loans, car loans and other types of loans and financial products.
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