Help, I Owe More Than My Car is Worth: What To Do When Your Car Loan Is Underwater

I owe more than my car is worthOwning a car is different than owning a home. A home will generally hold (or increase) its value, while a car will almost always lose its value the longer you own it. When you owe more money on the asset than it’s worth, that’s called being “upside down” or “underwater.” And one of the things people often find themselves saying when they’re in debt is “I owe more than my car is worth.”

If that applies to you, then you’ve got some tough decisions to make. But the good news is, there is hope! You can start by using ReadyForZero to get an overview of your debt picture. And thankfully there are several strategies (see below) you can implement when your car’s loan is more than the car’s value:

How to Get Out of an Upside Down Car Loan

1. Find out how much your car is worth

The very first step you need to take is to find out how much your car is worth. You can use sites like Kelly Blue Book or Edmunds to determine the amount of your car’s current value for free. To get an accurate valuation, be honest about the condition of your car and enter the exact mileage.

2. Get updated on the balance of the loan

Contact your local bank or loan company to find out the “payoff” balance of the loan. Then compare this figure to the estimated value price from step one. Sometimes car owners discover they’re not really upside down after all. However, if you bought a new car with nothing down, or rolled the balance of a previous car loan into your new one, the chances are high that you’re in an upside down car.

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3. Move the excess car debt to a local bank or credit union

If you discover you are in fact underwater with your car loan, if you try to sell the car you’ll end up with excess debt. For example, if you owe $10,000 on the car but it’s only worth $7,500 you’ll end up with a balance of $2,500 to pay the bank before they’ll release the title to the new owner.

One of the most cost effective ways to handle this, is to take out a loan from a local bank or credit union to cover the excess debt. Local banks often have lower interest rates and you’ll have a higher chance of getting approved. This step is a lot easier if your loan is already financed through the same bank.

4. Consider alternate sources of funding for paying off the car loan

If your bank or credit union won’t budge, or your car is financed through the dealership, you’ll have to look for alternate sources of funding to cover the difference. If you have good credit, using peer-to-peer lending networks like Lending Club or Prosper could be good options.

You could also consider taking advantage of a credit card with a balance transfer offer. You might be able to get a low introductory APR of 0% for a period of 6-12 months or until the introductory period ends. This method can be risky, though, so be cautious when choosing this option.

5. Throw extra money towards the car loan

Finally, if you can’t find a buyer who wants to purchase your car or you can’t secure a way to pay the excess debt you owe on the car, you’ll need to find extra money to cover the difference. There are two ways you can do this:

  1. Find stuff to sell
  2. Boost your income

Selling some major items like extra furniture or jewelry might help, or you can sell electronics or other items on eBay or Craigslist to raise money. If you’d rather go the boost income route, the only answer is to get a second job or work over-time at your current job.

This doesn’t have to be anything permanent, just a temporary fix until the car loan shortage is corrected. There are even legitimate ways to make extra money from home, which might be the push you need to start your own small business or freelance career.

The remaining debt is much more manageable than the full balance of the loan, so you’ll want to get as much out of the sale of the car as you can. The balance left over is what you need to makeup by selling stuff or making extra money.

Avoid Owing More than Your Car is Worth in the Future

Once you’ve finally recovered from an underwater car loan, you’ll want to make a plan to avoid this problem again in the future. Cars will always rapidly go down in value. Once you drive them off the lot, they aren’t so much an asset as they are an expense. When you’re ready for your next car, keep these tips in mind so you’ll never have to be upside down on a car loan again.

1. Don’t finance an auto loan through the dealership

Car dealers know that as long as it has an engine in it, the car’s value will always be going down – which is why they push hard for the financing with them. I learned this lesson the hard way, when I financed my new car through the dealership. They come with higher interest rates and excess fees than if you finance through a local bank or credit union.

2. Put at least 20% down on any car loan

Treat your car like a house and try to have at least 20% of the purchase price available in cash for a down payment. In the past, I’ve put about 50% down on my vehicles and it’s saved me loads of hassle and money in interest charges. This extra down payment will be your best defense against the horrendous depreciation that your new car experiences over the next two years.

3. Pay more than the minimum payment on your car loan

If you’re going to finance, try to pay more than minimum payment. Do whatever you can, even if it’s $20 or $50 extra per month, every little bit helps. You’ll be able to payoff more of the principal balance earlier, which means you’ll build up less interest. The faster you pay off the loan, the better off you and your car will be.

Hopefully, with all of these tips, you’ll never again find yourself saying the words “I owe more than my car is worth.”

Have you ever been stuck in an underwater car loan? What did you do? Tell us about your experience!

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  • We just recently purchased a new car and I took out an auto loan at 1.49% instead of paying cash. I can’t believe that a car can depreciate fast enough for you to be under water, but I am sure there are plenty of people that it’s happened to.

    • Wow, 1.49% is a great deal. Way to be prepared and approach the process thoughtfully.

    • db

      we desperately needed a new car and the only people who would approve us gave us 19.75% ….THAT is how a person can get underwater. also, the car for retail sale is worth about 5000 more than if I were to sell it.

      • wg

        i bought a car from a dealership when my ven broke down afdter walking to work for 2 weeks 20 miles a day got old quick now im stuck at 23 apr and going to end up paying $12,546 for a 2000 honda civic ex thats worth 2500 maybe on a great day and i pay more in interest than my princable right now priciple is 9,056 as of yesterday. fuck me upside down under water in barrell rolling down a hill in the ocean. but its a car

        • I’m really sorry to hear that. In the future, it might help to look on Craigslist and buy from an individual rather than a dealer. I’ve done this in the past and was able to get a pretty reliable used car (Toyota Camry) for just a little more than $2,500. Of course, I realize that doesn’t help you with your current situation. Is there anyway you can get out from under that loan? A 23% APR is really high. If you think the lender is taking advantage of you, it may help to file a complaint with the CFPB: You can also check out our Auto Loan resource center: Let us know if we can help any further. And don’t forget to try out!

          • Marie Armentino

            Be careful of Craig’s list. There are scams every where and every imaginable kind. We were scammed on Craig’s list. We lost $3,500. We are still paying it back.

        • Tabitha

          Refinance the car. Your intrest rate should go down & you would save on the intrest.

  • how about selling the car and ride a bike instead?

    • That’s a great idea! Although it is easier said than done…

  • The highest depreciation happens in the first year. Buy a car that is one year old instead of new at the end of the season when the new cars come out, and you will get a better deal. Really push for a good deal, and with the internet you can research and only go into the dealership once you have whittled the price down to what you want it to be. You won’t get all the deals from the manufacturer, but you can usually twist the dealer’s arm to give you the same warranty as new especially if the year old car is “new”. Make sure you get everything in writing, including “what warranty” you are getting.

    • Shannon_ReadyForZero

      Great advice, thanks so much for sharing!

    • Vivian F.

      Usually those that are just making ends meet, seem to buy the cars they can least afford. Car Dealers have mastered how to target these vulnerable people.

      The debt spiral is not for me, and I prefer living a life not owing anyone anything. I’m just gonna make smart decisions with my money so I don’t end up with an empty bank account:

      1) Paying off my debts as they come to me. Never holding a credit card balance longer than a month. If this means living in a small studio apartment and eating ramen, rice, and beans, so be it.

      2) I will always buy small, fuel efficient and durable cars. I drive a 2006 Honda Civic now. It costs me nothing to fill up and next to nothing to insure ($24/month from InsurancePanda… woohoo!). I will not drive when I don’t need to, and use public transportation whenever possible.

      3) Developing multiple revenue streams. Doing side jobs. Building up small businesses. Doing contract work. Basically doing whatever I can to generate income from multiple sources.

      4) Grow my revenue and assets no matter what. Make sure I am always expanding and develop them to the point that they consistently generate reliable cash flow.

      5) The most important one – make as much as I can. Save as much as I can.

      iPhones… ecigarettes… Starbucks… Chipotle Burritos…new clothes.. organic lipgloss… expensive yoga classes. Why not try living in your means for once? No wonder we have a debt crisis

  • AlexSmith

    I was able to change the way I think about my cars. When I was young, I always wanted the newest and coolest. And got upside down every time. Cars are not an investment they are an expense. If you can find a car 2-5 years old that has a good track record for long life (Honda, Toyota, Subaru) and has been maintained, you could easily negotiate the price down at the dealership, before financing, enough that the time spent “upside down” on your loan will be negligeable. I bought a 2007 honda in 2013 with under 100k miles for the exact same amount as the trade in value. After only 8 months, I already owe less than the car car is worth. AND, it is a honda that I can expect to get 200-300k miles out of. In today’s world of online shopping, the best deals come to those who know how to shop. It is very common for dealerships to list their vehicles online at up to $1000 less than at the dealership. They know low prices will make people come to their location with little to no extra effort on their part. Let’s see, spend $1000-$3000 on TV adds and newspaper adds to advertise a cars price or, press a couple keys on a keyboard and the entire planet can see your prices. I did it. I drove 1 hour to buy my honda and if it hadn’t been for looking online I never would have found it. Shop smart.

    • That’s very interesting! I’m glad you were able to see the effect of the new cards on your finances and shift your attitude toward car buying. Congrats, and enjoy that reliable, affordable car!

  • Greg

    If you owe more than your car is worth, it only makes sense to start thinking about selling if if, after you replace it (you need a car, right?), you’ll be ahead. If you sell the $7,500 car that you owe $10,000 on, where will that you leave you? Shopping for a car.

    A car (or a house) is not a savings bond. Its value to you is not the resale price, it’s value to you is getting you to and from work every day, getting the groceries, getting the kids to the soccer game. Who cares what the resale value is? Resale value doesn’t get you to Grandma’s for Thanksgiving. When you buy a car, look for a deal and get something you can afford, and then use it and don’t even look at the resale price.

    • Interesting point. That does make sense! Thanks for your comment, Greg.

    • Mike Rawls

      I agree with you. Me and my wife has been trying to sale our car for almost 3 1/2 months now and haven’t rrcieved a positive, worthy, buyer to save our lives. We are now at our wits end trying to sell a third vehicle that we are still making hardship payments on through the bank.


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    I found that the car dealer always had better rates then the bank. Where i may go to my bank/ credit union once every few years for a loan, the dealer may use the same lender multiple times a week to get loans approved for their customers. So as a result, they get “preferred rates” that they can pass on so that they can secure the financing. Why is it so important to a dealer that they get the financing? One main reason is because when you are ready for another vehicle, you are more likely to go back to them because they “did everything “, provided the car, got the loan set up, they even have a service center as well too. It also allows them the chance to present warranties, and other products (life and disability insurance, key insurance, wheel insurance, paint amd fabric protection, etc.)

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    Your car should be worth whatever you still owe on it, especially from the same dealer you purchased it from. Either they or your lender should compensate for depreciation on your loan. this should be against the law for that to happen

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