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Addressing the Problem of an Upside-Down Car Loan

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The problem of being upside-down on car loans isn’t unique to Bostonians. In fact, according to the Kelley Blue Book, two-thirds of all car buyers who visit a dealer’s showroom with a trade-in owe more on the trade-in than its value. If you find yourself ‘upside-down,’ know that there are five options you can pursue. They are listed below:

1. Sell the car

This is a surprising option, yet it is one suggested by financial expert Dave Ramsey. Sell the car privately, even if it is worth less than what you owe. How do you make up the difference? You borrow.

Say for instance you owe $20,000 and the car is currently worth $16,000. Even if you manage to sell the vehicle for its current value, you are still $4,000 short. Ramsey recommends borrowing the difference from the credit union or local bank you took out the loan from. According to him, owing $4,000 is better than owing $16,000, so you should negotiate for such an arrangement.

Note that this strategy is most likely to work only if you borrowed from a credit union or a local community bank. If you borrowed somewhere else, this may not be possible. Credit unions and local community banks are more likely to work with you if you are struggling to make payments.

2. Roll over the balance to a new car loan

If you are planning to buy a new car and your current one is worth less than your existing debt, you may roll over the remaining balance to a new car loan. The roll-over will enable you to drive home the new car immediately, which is a great thing if the vehicle is an urgent need.

However, doing this will force you to repay the loan over an extended period of time, and repaying a long-term loan will again put you in an ‘upside-down’ situation and for a longer period. At some point, the value of the new car will be less than your loan balance.

3. Look for a car with enough incentives

This is similar to the aforementioned second option, but it is deemed less risky. When shopping for a new car, choose one that has enough incentives to cancel out your existing debt. Unfortunately, this third option also makes being upside-down inevitable down the line. Vehicles with incentives depreciate faster than those without incentives because the resale value is eliminated from the car outright.

4. Refinance with a short-term loan

If you are fine with keeping the car, you can refinance the original loan. You need to repay the new loan over a shorter period of time so you will not be upside-down any longer. Traditional lenders usually don’t refinance upside-down loans, but there are many finance companies that are open to that kind of refinancing. The only problem with this option is that you will be stuck repaying a loan for a vehicle that is no longer covered by its original warranty and one with a lot of miles on its odometer.

5. Keep the car longer

This is probably the best of all options, and the wisest decision from a financial standpoint. Keep the car until you have enough equity for a new purchase.

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