How to Escape an Upside-Down Car Loan

One of the fastest ways to recoup those costs is to pay off your car faster. 

You'll slow down your car's depreciation by making larger monthly payments and paying off your car before your loan terms are up. You’ll then be able to sell your car and use those funds for a larger down payment (or buy a car outright), so you won’t have to borrow as much in your next car loan.

If your current budget doesn’t allow you to put more money towards your car loan, try to rework your budget to see if there’s any wiggle room. In the long run, paying off your current loan might be financially better than refinancing or rolling it into a new one by trading in your car.

Refinancing your car loan involves taking out a new car loan with a new lender, interest rate, and repayment terms. Your new lender pays off your old loan, and then you’ll make monthly payments to your new lender. You can use Caribou to help you find the best refinancing option to save big with lower monthly payments. Join other Caribou customers saving an average of $151/month on their car loan.*

A lower interest rate means you can put more towards your principal balance. You can also refinance to shorter repayment terms, allowing you to pay off your loan faster and slow down depreciation.

However, refinancing may not be the best option. If you can’t find a lower interest rate than what you’re paying now, you’d pay more in interest over the life of your loan. And if you refinance to longer repayment terms, it could mean expanding that upside-down car loan even more.

You can take your car to a dealership to trade it in. The dealership will roll your old loan into a new one, which could mean larger monthly payments since you’re paying both loans simultaneously.

Be mindful of how to approach trade-ins. Do your research on which car you’re looking for and what’s in your affordable price range. Check out cars that depreciate slower or opt for a less-expensive vehicle.

You can try to sell your upside-down car to a dealership or through a private sale. While dealerships might give you money faster, you could make more through a private sale. You may also consider selling your car to CarMax or Carvana, as you can get a quick offer online.

Once you have the money from your car sale, you make a lump-sum payment to your lender. You may still have a balance, but you'll pay it off much faster than if you continue monthly payments at your current rate.

If you’re having significant trouble making car loan payments in your current setup, talk to your lender about your options. They’re more likely to work with you if you explain your financial struggles, not after you’ve missed a few payments. 

Ask your lender about voluntary repossession. This is when you voluntarily give up your car because you can no longer afford payments. You don't have to make loan payments like you did before, but there’s a chance you might still owe your lender some money, especially if they try to sell your car and get back less than what you owe on it. If so, you may be responsible for the remainder.

Keep in mind that repossession is detrimental to your credit score. It can stay on your credit score for up to seven years, making it difficult to qualify for a car loan in the future. And if you do get one, you may have to settle for a much higher interest rate than someone with good or excellent credit.

If you’re struggling with paying your bills, find debt management help. Relief helps folks negotiate past-due balances with creditors on their behalf. You’ll start making affordable monthly payments to help put you back on track.