What is an upside-down car loan?

My first car is finally sputtering out of existence, so I'm starting to look into getting a car loan to buy a new one. I keep hearing that I need to avoid getting into an upside-down car loan but haven't seen anyone actually define this term. What kind of loan is this, and how do I avoid it?

Answer
“Great (and important) question! An upside-down car loan is a fairly common type of occurrence where the borrower owes more money on the vehicle than the value of the vehicle.
This can happen with high-interest rates, but unfortunately, your loan can also go upside down as soon as you drive off the lot. Cars depreciate in value quickly, and new cars can instantly lose 10% to 20% of their value after leaving the dealership.
However, getting into an upside-down loan is not unavoidable. You can:
  • Pick a car with good value
  • Make a larger down payment
  • Buy a used car
  • Find a lower interest rate
The idea here is that you don’t overextend yourself or sign a loan because the want for a car overrules reason. In general, many people go upside down because they’re buying a car that’s outside their financial means.
So to ensure that you aren’t upside down on your car loan, you should check the value of the vehicle before you buy it (if it’s used) and compare that to the price offered by the dealer or seller. On a new car, the best way to make sure you don’t go upside down is by making a 10% to 20% down payment. With this down payment, you offset the depreciation that accumulates when you drive off the lot.
You can use free tools like Jerry to see if you’re eligible to get different refinancing options if your loan no longer works for you. And even if you do end up going upside-down, there are ways to get out of that too. With the right tools and resources, you should be able to keep that loan rightside-up!”
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Eric Schad
Answered on Aug 20, 2021
Eric Schad has been a freelance writer for nearly a decade, as well as an SEO specialist and editor for the past five years. Before getting behind the keyboard, he worked in the finance and music industries (the perfect combo). With a wide array of professional and personal experiences, he’s developed a knack for tone and branding across many different verticals. Away from the computer, Schad is a blues guitar shredder, crazed sports fan, and always down for a spontaneous trip anywhere around the globe.
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