If You're Upside-Down (Car Buying Tips)

If you owe more on your car than it is worth, then this car buying tip is for you.

I had a customer who wanted out of his payment. The guy got financed at close to an 18% APR. That is quite high. He owed about $4,000 more than his truck was worth and his monthly payments were stretching his budget too thin. In car lingo, this is called "negative equity." His solution was to trade in his truck and buy something newer while hoping he could get a lower interest rate.

Here is the problem with that. Whatever vehicle he chooses will be bought with an additional $4,000 added to the price to cover the negative equity. It's normal to have negative equity for about the first two years of a car loan, but with the extra $4,000, this guy would be upside-down for at least three years or more.

What Should You Do If You're Upside-Down?

• Do not try to trade in your car so that you could get a lower payment on another car. It will just make you even more upside on the next car you buy. This is a cycle to avoid.
• Your best bet is to refinance at a lower interest rate. Use every possible resource to find a better interest rate than the one you're currently paying. In the case of this individual who was paying 18% interest on a $24,000 vehicle, his payments were around $660 per month and his total interest on the loan was over $13,600. If he could drop his interest rate to 15%, his monthly payment would reduce to about $620 and his total interest would be about $11,140. That's a reduction of about $2,460 in total interest charges over the life of the loan. Try my car loan calculator to run through different interest rate scenarios for your situation.
  
• When refinancing, figure out how many payments are left according to the original loan. Make this the term on your new loan. So, if you have 30 payments left, get a 30-month loan. If you're willing to pay a little more in total interest to reduce the monthy payment, stretch it out a few months, but avoid this if possible.

Written by a former car salesman, college math instructor, health insurance analyst and the author of The Car Buying Bible. This 162-page car buying guide is full of great car buying tips and offers the best car loan calculator around.