Upside down

What is upside down?

Upside down describes the situation when you buy something on credit and now owe more for it than it is worth. You can be upside down on your home, automobile, or even tickets to an important event.

Deeper definition

Kelley Blue Book posits that many people are upside down on their cars because they were too eager to get into a new car and did not carefully consider the financial consequences. The best you can do when you are upside down on an auto loan is to consider your options.

  • Keep the car until you can pay it off or its value catches up with the amount you owe. This option may mean paying a little extra toward the payment each month in order to speed the process.
  • Roll the existing debt into a new car loan. It is important to remember that when you roll an existing loan into new debt, you still end up paying for that car you traded, even though you are no longer driving it.
  • Keep an eye on incentive deals. On occasion, a finance company will offer to pay off your old loan if you finance a new vehicle.
  • Refinance your existing vehicle. If the interest rate drops, refinance for a shorter term. The faster you pay down the principal, the nearer you are to having your head above water.

In most housing markets, there is a natural ebb and flow. Something as minor as an improvement in public transportation can cause home values in an area to rise. By the same token, a school district that experiences a sudden crime spree can cause neighboring home values to plunge. If you simply paid too much for your home or something has happened to soften the market, it is possible you are upside down. No matter what you do at this point, it is unlikely you would be able to sell your home for as much as you owe on it.

If you have trouble making payments or absolutely need to sell, there are three things you can do.

  • Talk to your mortgage lender about any payment reduction programs they may offer.
  • Look into a federal relief mortgage program, such as the Home Affordable Refinance Program, or HARP, which has been extended until at least September 2017.
  • Consider a short sale. A short sale is when your lender allows you to sell your home for less than you owe, helping you avoid foreclosure.

Example of upside down

Say your hometown baseball team won the World Series and suddenly, the cost of game tickets has soared. In anticipation of making a profit, you pull out your credit card and buy an entire row of season tickets, believing you will be able to resell them at a profit. Early in the baseball season it becomes obvious that your team has tanked and is not going to end up with a winning record. Those tickets you bought are worth less than the amount you paid for them on credit, and you are now upside down.

Use our auto loan calculator to figure out how much the payments will be on your next new or used car.

Other Personal Finance Terms

Experian

Experian is one of the three major credit bureaus. Bankrate explains

Aftercare

Aftercare is care you receive after medical treatment. Bankrate explains.

Disbursement

Disbursement is a financial and accounting term. Bankrate explains what it means.

Money laundering

Money laundering is a criminal activity. Bankrate explains how it works.

More From Bankrate