9 ways to avoid, correct upside
down car loans |
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2. Do not finance
the taxes and fees.
Including taxes and fees will merely keep your loan upside down
longer.
3. Take out the
shortest-term loan you can afford.
You'll pay more each month, but a bigger portion of each payment
will go toward paying down principal with a shorter loan term. Hence,
you'll build equity faster.
If you must finance for more than five years to afford
the payments, you probably can't afford the car.
4. Don't take
a loan for longer than you intend to keep the car.
Trading in a vehicle with payments remaining means that you must
make up the difference in cash, which might force you to make a
smaller down payment or roll the old loan into the new one, which
could easily lead you into a cycle of upside down loans.
5. Consider gap
insurance.
Most lenders offer the option to make up the difference between
a car's insured value and the loan payoff balance if the vehicle
is totaled or stolen. Gap insurance will increase your monthly payment,
but it provides peace of mind and could save you a bundle.
6. Buy a used car instead.
The previous owner will have absorbed the depreciation, which means that your car will hold its value better over the life of the loan.
Already upside down?
If your existing car loan is upside down, putting it right-side
up isn't easy, but it's worth the effort.
7. Keep the car until its value matches or exceeds the balance on the loan. Driving a clunker for a year or two could save you from a long-term financial predicament.
8. Buy cheap.
If you absolutely must trade in a car with an outstanding balance, put your pride aside and get the least expensive new or used replacement that will meet your basic needs. Get the shortest loan term (and the highest monthly payments that you can afford). Once that loan is paid off, you should have enough equity in the car to put a sizable down payment on the car that you really want.
9. Sell your car yourself.
It's more work, but you're likely to get more from a private buyer than a dealer will allow you on a trade in. The difference may be enough to wipe out the remaining loan balance, giving you a fresh start.
Niles Howard is a freelance financial writer in Connecticut.
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