5 tips to avoid an upside-down car loan

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for .

If you are shopping for your next new or used car and know you’ll be financing at least a portion of the car loan, you’ll want to do some careful planning to avoid being upside down in your loan, or to at least minimize the time that you are in this precarious financial state.

When you owe more than your car is worth, you set yourself up for being in a financial jam if your car is totaled in an accident or stolen, or if you decide you need to sell it for financial uncertainty in your life.

These days, most people who finance a new car are upside down at least for a short while since new cars lose their value the moment they are driven off the dealer’s lot. The problem is that with today’s long-term car loans of five years or more, it takes even longer to get to the point where you are right-side up. Here’s how to avoid being upside down in your next car loan.

Choose a car that holds its value better. Different makes of cars hold their value better than others and selecting a car that will depreciate more slowly will shorten the length of time you are upside down in the car loan. As you research what car to buy, look at the ownership costs listed for each car on an independent car information website to see the differences in the depreciation among your top few choices.

Plan to pay the taxes and fees outright. Rolling these additional charges into your loan automatically puts you upside down, since you’ll be financing more than the car is worth.

Aim to make a down payment. Because the first year of depreciation of a new car is the greatest, making a down payment can offset the length of time you’ll be upside down. Try to put down 20 percent of the total cost of the car, including taxes and fees. You may not have to come up with as much cash as you think because cash-back rebates offered by the manufacturer and any equity you have in your trade-in count toward that 20 percent down.

Choose a loan that equals the length of time that you’ll likely keep the car. If you trade in your car before it’s paid off and you are upside-down, you’ll need to either pay cash to pay off the loan or the payoff amount will get rolled into your next loan. That will automatically put you even further upside down in your next car.

Shop around for the lowest interest rate possible. Consult the manufacturer’s website for any cut-rate financing deals, as well as your local credit unions and any banks where you have an account. Also, you can use Bankrate’s loan comparison tool to find the best rate for you and the car you want to buy.

If you are buying a new car, you may still end up upside down in the car loan for at least a short time. Compare the depreciation values listed for the car on an independent car information website to the amortization table in Bankrate’s auto loan calculator to see how long you will be upside down in the loan. And consider buying gap insurance to cover you during the upside-down period of the car loan.

Ask the adviser

If you have a car question, e-mail it to us at Driving for Dollars. Read more Driving for Dollars columns and Bankrate auto stories.

Bankrate’s content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate’s Terms of Use.