Posted on: Apr. 16, 2017 in Car Loans, Money

Have you ever heard the term “upside down” in reference to a loan? How about “underwater” or “negative equity?” They all essentially mean the same thing. While it’s not a good position to be in, it’s certainly not an uncommon one. So, what does it mean? These terms refer to the situation where you owe your lender more than the thing you purchased is worth. This scenario occurs most often with homes and cars.


With homes, people tend to end up upside down when they buy at a higher price and then the market turns and the value of the home goes down. Imagine you buy a home for $200,000. After time, maybe the amount you owe the bank is $150,000. If you decide you want to sell and find out it’s only worth $125,000, you’re stuck because your home is worth less than you owe and you can’t sell it and make enough to pay off the bank. This can be a pretty sticky situation.

The same thing can happen with a car. Cars depreciate pretty quickly after purchase – the value goes down almost immediately. In the first year alone, a brand-new car can lose up to 20% of its value. While used cars depreciate more slowly, they still continue to lose value over time. If you’re planning to own your car for the long haul, this may not matter very much to you. However, if you want to trade it in or it gets totaled, you may find that the value is too low and you’ll still owe the bank even if you no longer own the car.

Beside depreciation, having too small of a down payment can be the cause of a negative equity situation. This is particularly true for a brand-new car. Those deals out there for $0 down and the like may seem great on your wallet at the time, but the can certainly bite you later.

If you find yourself underwater on your auto loan, here are a few things you can do:

  1. Make extra payments. If you’re in the potion to lower the amount you owe, do so.
  2. Refinance. If you are able to get a better interest rate, you can make the same monthly payments and more of it will go toward the principal balance you owe.
  3. Don’t get rid of the car. If you were hoping to trade it in for a better ride, wait until you can pay down the balance. While it will continue to depreciate, you’ll hopefully be paying as much as you can to turn things around.

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