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My car's upside-down!

Dr. Don TaylorDear Dr. Don,
I need a lower car payment, but I'm too upside-down in the car to trade. Should I trade anyway and be upside down in the next car too, or should I refinance what I owe? -- Tires Higher

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Dear Tires,
When you're upside-down in an auto loan, you owe more on the loan than you could reasonably expect to get by selling the car.  You can't pay off the loan with the proceeds from the sale, so you're stuck with the car and the payments. 

Getting a lower payment on your car loan requires a lower interest rate, an extended loan term, or both.  Car loans are securitized loans, meaning that the lender has a security interest in the vehicle until you've paid off the loan. 

Any lender willing to loan you enough money to pay off the existing loan will have a loan that is only partially secured, since your loan balance is higher than the car's market value.  That means that a lower interest rate isn't likely.

To get a lower payment, your focus should be on extending the loan term. Switching from a three-year loan to a five-year loan, even at a higher interest rate, will bring down your monthly payment as shown in the table below:

 

Existing loan

New loan

Difference

Loan balance:

 $10,000

 $10,000

 

Loan term (months):

36

60

 

Interest rate:

8%

12%

 

Monthly payment:

 $313.36

 $222.44

 $90.92

Total payments:

 $11,281.09

 $13,346.67

 

Total interest:

 $1,281.09

 $3,346.67

 $(2,065.58)

In the example you free up $90 a month in your budget but wind up paying an extra two grand in finance charges.  Bankrate's auto loan calculator can do the math for you given the particulars of your loans.  The calculator's amortization schedule will even provide the total interest expense number.

As you point out, some car dealers will let you capitalize the negative equity in your car by rolling it into the loan for a new car.  You're going to really pay up for this privilege, losing any negotiating power in determining both the price of the car and the interest rate on the loan.

The best approach is to talk to your current lender about extending the term of your existing loan.  They're not going to want to do it, but if you can demonstrate to them why this is important to keep you solvent, they should grasp that it's better to restructure the loan than have it become a nonperforming loan. 

 
-- Posted: Oct. 11, 2002
   

 

 
 

 

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NATIONAL OVERNIGHT AVERAGES
48 month new car loan 3.15%
60 month new car loan 3.16%
48 month used car loan 2.91%




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