By: Robert J. Nahoum
An underwater car is a car loan where the owner owes more on the loan than the car is worth. This can happen for a number of reasons, such as:
- Buying a car little to no down payment.
- Taking out a long-term car loan.
- Rapid depreciation of the car.
- Damage to the car.
Why is Being Underwater on a Car Loan Bad?
Being underwater on a car loan can be a bad situation for a number of reasons. First, it means that you are essentially upside down on your investment. If you were to sell the car today, you would not receive enough money to pay off the loan. This could leave you with a balance (referred to as a “deficiency balance”) that you would have to pay off out of pocket.
Second, being underwater on a car loan can make it difficult to refinance your loan. Lenders are less likely to refinance a loan if the car is worth less than the loan amount. This could mean that you are stuck with a high interest rate, which could make your monthly payments more expensive.
Third, being underwater on a car loan can make it difficult to trade in your car. If you want to trade in your car for a new one, you will likely have to pay the difference between the car’s value and the amount you owe on the loan. This could be a significant amount of money, which could make it difficult to afford a new car.
How to Avoid Being Underwater on a Car Loan
There are a few things you can do to avoid being underwater on a car loan:
- Make a large down payment. This will reduce the amount you borrow, which will make it less likely that you will be underwater on the loan.
- Choose a shorter-term loan. This will mean that you will pay off the loan sooner, which will reduce the amount of depreciation that you will experience.
- Buy a car that is less likely to depreciate quickly. Some cars, such as luxury cars and sports cars, depreciate more quickly than others. If you are concerned about being underwater on your loan, you should choose a car that is less likely to depreciate quickly.
What to Do If You Are Underwater on a Car Loan
If you are already underwater on a car loan, there are a few things you can do:
- Continue to make your monthly payments. This will help you to pay down the loan and reduce the amount that you owe.
- Consider refinancing your loan. If you can get a lower interest rate, you will be able to save money on your monthly payments.
- Trade in your car for a newer car. If you can trade in your car for a newer car that is worth more than the amount you owe on your loan, you will be able to get out of your underwater loan.
- Sell your car privately. If you can sell your car privately for more than the amount you owe on your loan, you will be able to get out of your underwater loan.
Being underwater on a car loan can be a bad situation. However, there are a few things you can do to avoid being underwater on a car loan or to get out of an underwater loan if you are already in one. By following these tips, you can protect yourself from the financial consequences of being underwater on a car loan.
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The Law Offices of Robert J. Nahoum, P.C