If you owe more than your car can be sold for then you have what is called an upside down car loan. You are said to be upside down in the loan because your balance sheet is not showing a positive value. If you owe $20,000 on your car but the Blue Book is only $15,000 then you are in the red by $5000. This is not a good position to be in but it is not uncommon when someone buys a new car. The value difference between a new car and a used car with 10 miles on the odometer is quite a lot. So as soon as you drive the car off the lot then you are upside down unless you have paid part of the purchase price with a down payment.
If you have an upside down loan you really only have three options. The first is to continue to make the payments until the value of the car and the remaining loan amount come into alignment. This can be difficult but it does two things. It allows you to get out from under the loan with your credit rating intact and it improves your score if you make all your payments on time.
The second option is to sell the car for what you can get out of it and pay the remainder off with funds from somewhere else. Maybe you can use savings, or sell something to raise the funds, or take out an unsecured loan for the balance after sale. This method will also allow you to keep your credit rating.
The last option, and not a very good one, is to let the car get repossessed. This will hurt your credit score and make it harder to buy things in the future. If you have ever tried to buy a car bad credit you know how difficult it is if you don’t have a record of paying your loan payments on time.
Just because you have an upside down loan doesn’t mean you should panic. Remember, most people who buy new cars are underwater at the beginning. Just make your payments and enjoy your car.
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