Are you Upside Down on Auto Loan?

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Getting upside down on a car loan means your loan exceeds the current value of your vehicle. In other words, you owe more than you could get by selling your car or by using it in a trade-in deal. As you can't pay off the loan due to the negative equity, you're stuck with the car and the loan payments.

Reasons of getting Upside Down on Auto Loan

Following are the reasons which can cause an upside down auto loan:

• Low Down Payment or No Down Payment

A lot of borrowers intend on saving their cash and avoid down payment but it ultimately increases the interest amount.

• Longer Term

A car loan term of five years or more can also increase your chances of being upside down. Remember that even if your payment seems affordable now, you are paying a lot more in interest because of longer term.

• Rolling Old Car Payment into New Car Loan

Some people with an intention to get rid of this situation transfer their old car's remaining balance into a new auto loan. Thus, add extra debt on their new auto loan which increases the chances of upside down all over again.

• Higher Interest Rate

While accepting vehicle loan, it may happen that you are forced to take a higher interest rate either due to bad credit or any other reason. It may direct your payment to interest more than principle.

• Paying High Value for a Car

It happens when you buy an automobile without checking the Blue Book value, and end up paying more on your car.

How to Avoid the Upside Down situation in the Future?

• Make down payment (at least 20%).
• Keep the car loan term shorter than 5 years.
• Keep your car loan payment limited to 20% of your income.

How to get out of the Upside Down situation?

Pre-payment could be an excellent way to pay off the loan faster. However, you need to be sure that your current loan does not include any pre-payment penalty because it could restrict you from paying additional cash. Thus, you can make extra payments each month and stay away from being upside down.