In a hole with an upside-down auto loan

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Got a car you want to trade in?

Get ready for a shock.

Not even rock-bottom discount financing or a hefty cash rebate on a new car can make up for the low-ball offer a dealer is likely to make on your trade-in.

Blame it on reverse sticker shock.

“The high new-car incentives have caused used-car prices to go down,” says Tom Kontos, a vice president at ADESA Corp., an auto auction and remarketing services company. “They’re going to get an unexpectedly low price on the trade-in.”

Getting socked with a low price on a trade-in is especially bad news for the 40 percent of new-car shoppers who are upside down on their old auto loans.

Upside-down loans on the up
“Upside down” means owing more on a car than it’s worth. When a dealer knocks down the value of your used car even further, the financial hole you’re in gets that much deeper.

“There has always been cases of consumers being upside down, but it’s been growing increasingly worse over the past five years,” says Bob Kurilko, vice president of product development and marketing at

“It’s an alarming statistic that 40 percent of consumers are upside down.”

And it’s not as if today’s car shoppers owe a few hundred dollars more on their old cars than they’re worth. The average negative equity is $2,200.

“It’s about as high as it’s been,” Kurilko says.

How could this happen? It’s easy. Just combine a low down payment or no down payment with an auto loan with a longer term — say five, six, even seven years. Toss in the rapid depreciation that hits every new car in the first couple of years and presto, you’re upside down on your auto loan. Try to trade in your car and you’ll find yourself awash in negative equity.

Some folks make matters worse by rolling the old car’s remaining debt into a new loan. They’re forced to pay interest and make payments on a car they don’t even own anymore. And tacking the extra debt on their new auto loan puts them upside down all over again.

“Once you get on that merry-go-round, you’re on that merry-go-round and it’s tough to get off,” says Jack Nerad, author of “The Complete Idiot’s Guide to Buying or Leasing a Car.”

The best advice for someone who is upside down on an auto loan? Hang on to the car and keep on making payments.

“Keep the car they have, that’s probably their best financial bet,” Nerad says.

You’ll want to stick out the old loan until it’s paid for or, at the very least, until the amount you owe is roughly equal to the car’s market value.

If you really need to unload the car, you might want to try
selling the car yourself. You could pocket an extra $1,000 to $2,000, depending on the type of car, its age and how well it’s been maintained.

Happy with your car but having second thoughts about the long-term loan that you took on last year? Consider
refinancing the loan to a lower rate and term.

Avoiding the upside-down hole
Want to avoid the hassle of getting caught upside down on your next auto loan? Follow these tips:

Don’t skimp on the down payment.

These days, the average down payment for an auto loan isn’t much of a payment at all. A typical car buyer puts just 5 percent down. That isn’t going to get the job done.

“You’ve got to factor in that cars depreciate,” says Mark Perleberg, lead automotive expert at “To safeguard yourself you’ve got to put 20 percent down.”

Take a pass on the super-low monthly payment. Lots of new car buyers dig themselves into a financial hole by chasing a low monthly payment.

“Consumers are very driven by payment,” Kurilko says. “If they can get a lower payment by stretching out the loan, they do it.”

Don’t fall into this trap. Choose the highest monthly payment and shortest financing term that you can afford. Limit auto loan terms to four years or less whenever possible.

Buy a car you like and keep it. Being upside down on an auto loan can be big problem if you decide to exit a loan early. So choose a car that fits your driving needs and hang on to it. Never finance a car for more months than you think you want to own it.

Buy a used car. Want to knock down the balance of your next auto loan in a hurry? Buy a used vehicle.

It all has to do with a vehicle’s depreciation, or decline in value. The steepest depreciation occurs in an auto’s first two years, when its wholesale value plummets 30 percent to 40 percent of its original sticker price. So it’s not long before the value of a new $21,000 car drops by $6,000 to $8,000.

By buying used, you let a car’s first driver deal with that big depreciation nosedive. You get the car you want without the financial strain or the hassle of being several thousand dollars upside down on your loan.

For tips on landing a good deal on a used car, check out
this article.