If you have ever financed a car and been in a position where you still owe more on the loan than the vehicle's actual cash value, this is called being underwater.
Consequences of Being Underwater on a Car Loan
Being underwater on your loan (also referred to as being "upside-down") can be frustrating for a number of reasons.
- If you need to trade in the vehicle, you will have to make up the difference between the trade-in value and the remaining loan balance. Or, if the lender will allow it, you can roll that balance into the next car loan. Of course, that will mean higher payments on the new loan.
- If you try to sell the car on your own, you will find yourself in the same situation as above if you cannot find a buyer that will purchase the car for the amount owed on the loan contract instead of its actual cash value (ACV). This means that the buyer will need to cover the difference between the ACV and the loan balance themselves, as no lender will finance a car for more than its ACV. This may deter a buyer from purchasing your car.
- If the vehicle is totaled in an accident, and you don't have GAP coverage, you could end up still paying on a loan for a car you no longer have.
Ways to Avoid Drowning
When you are purchasing a vehicle, there are ways to steer clear of an underwater situation.
- Have a sizable down payment.
The typical down payment amount you should have in order to avoid going underwater on a car loan is 20%. Also, if possible, cover all of the tax, title, and license fees yourself instead of letting those costs get rolled into the loan. If offered, take advantage of cash back rebates as well, in order to reduce the amount you need to provide. Also, remember that trading in a vehicle with equity can go towards the down payment amount, too. And, if you are dealing with a damaged credit rating, a larger down payment will help you offset the higher interest charges.
- Buy a used/certified pre-owned vehicle.
Pre-owned cars have already taken the largest hit in depreciation (new cars can lose 20% or more in value in the first year), so if you couple the reduced price with a substantial down payment, you will significantly reduce the chances of being upside down on a car loan.
- Avoid zero down offers.
While these offers aren't typically made to car buyers with bad credit, they are worth mentioning. If you put zero down on a car, you will certainly be in a situation where you will owe more on the loan than the car is worth.
If you're already in a situation where you are underwater, there are ways to fix the situation, but it will cost you.
Get the Value Right
If you are in search of a vehicle and are looking to keep from repeating past mistakes, Auto Credit Express is here to help. We have a nationwide network of reputable car dealers who are ready to help bad credit car buyers get approved for the car loan they need. All you need to do is complete the fast, secure, and obligation-free application, and we will contact you and match you with a dealer closest to your local area that can help. Get started today.