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What It Means to Be Upside Down On a Car Loan & How to Avoid It

Tropical Financial Credit Union
By Tropical Financial Credit Union - July 8, 2024

Thinking it’s about time to trade in your car? Before getting all excited about a new ride, you might want to consider how much this trade in will end up costing you. If you’re lucky or have done your research you won’t be upside down on your loan and making your transition into a new auto loan will be pretty easy, but what happens if you’re upside down? Here’s what you need to know about being upside down on auto loans:

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What Does it Mean to be Upside Down on a Car Loan?

Being upside down on a car loan means you currently owe more on the loan than your car is worth. For example, here’s what it would look like if you’re upside down on an auto loan:

$15,000 (owe on loan) – $10,000 (what the car is worth) = $5,000 (amount upside down on loan)

It’s never fun finding out that you are upside down on your loan, especially when you want to trade in your car, but the good news is that there are ways to avoid this before it happens.

How Do I Avoid Being Upside Down on a Car Loan?

There’s different ways to avoid being upside down on a car loan. Here’s some ideas to keep in mind for when you’re shopping for your next vehicle and want to avoid being upside down. ready for a new ride let us help cta

  • Pick a car that holds better value. Different makes of cars hold their value over others. Consider this when choosing your next car because choosing something that holds its value will shorten the time you’re upside down on the loan. If you aren’t sure if you can afford a better make, this is where it helps to get pre-approved and if you need help finding a make, having an AutoAdvisor guide you through the process can be helpful as well.
  • Think about a down payment. If you have the money to spare on a down payment go for it. The biggest hit of depreciation happens when you drive the car off the lot, paying a down payment can help to offset the length of time you’ll be upside down.
  • Pay for taxes and fees upfront. You’ll have the option to either pay for taxes and fees upfront or add them into your financing. We recommend paying them upfront because it’s less money you’ll owe (which could be the amount you end up being upside down) and over time there’s the possibility you end up paying more for those taxes and fees due to interest.
  • Consider interest rates. Having a high interest rate can cause you to pay more total costs; costs that could end up making you upside down on your loan. When shopping around for cars think about shopping for low interest rates too. Consider a credit union as they are known to have low rates on auto loans.
  • GAP coverage. Florida is an accident prone state, which is why having GAP coverage can really save you if you were ever to get into an accident. This is how GAP saves you, say you get into an accident, your car is totaled, but you were upside down on your loan. GAP covers the difference between what you owe on the auto loan and how much insurance valued the car at.

Finding you’re upside down on a loan is never a fun thing, especially when you don’t have hundreds or thousands to spare. Remember these tips when going to pick out your next car, so you can avoid being upside down on your next auto loan.

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