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Ways to Get Out of an Upside Down Car Loan

June 4, 2022

Purchasing a new car is exciting! You find a car that fits your needs or your dreams, take out a loan, and close the deal. But the transaction doesn’t end there.

When you take out a car loan, it’s based on the value of your vehicle. But what happens if the amount of your loan becomes more than the car is worth? Unfortunately, the result is finding yourself upside down on a car loan.

A car loan becomes upside down when you owe more on the loan than the vehicle is worth. It can be called upside down, underwater, or even having negative equity.

It all means the same thing. Luckily, there are options out there for recovering from an upside down loan.

 after getting out of an upside down car loan, family takes biking trip in the mountains

How Did This Happen?

Knowing exactly what it means to be upside down on your car loan can help you prepare if you ever find yourself in that situation.

While there are many ways to get behind on a loan, it’s often the result of two specific situations.

No Down Payment

Usually, when you buy a car, you make a down payment. A down payment is a percentage of the vehicle’s total cost that you pay at the time of purchase.

A rule of thumb is to try to put down at least 20% of a new car’s purchase price or 10% of a used car’s purchase price. The reason for this is that your down payment amount affects many elements of your auto loan, including your:

  • Interest rate
  • Monthly payment
  • Loan-to-value ratio
  • Risk of being upside down on the loan
  • Chances of loan approval

A new car can lose up to 20% of its value in the first year alone. So if you don’t put down 20% or don’t put down anything at all, you could quickly find yourself upside down on your loan.

Long Repayment Term

A loan term is the amount of time you have to pay back the loan. Most car loans are available in 12-month increments. The most common range is from 24 to 84 months. At SeaWest, our loan terms start at 36 months.

A longer loan term may result in lower monthly payments. But that is not always a good thing. Yes, you will be paying less each month but that is giving extra time for your car to depreciate. By the time your lengthier loan term is complete, your car may be worth less than what you paid for it.

How to Get Out of an Upside Down Car Loan

If you find yourself underwater on your loan, know that there are solutions out there to get back on level ground. At SeaWest, we are here to help you make the best decisions and financial choices. Consider which of these may work for you – or give us a call to discuss other strategies.


A common way to get right side up on a loan is to refinance. When you refinance a car loan, you take out a new loan that will pay off your old loan. It basically allows you to push restart on your loan.

Of course, if you refinance, you want to make sure you’re refinancing at a lower interest rate or with a shorter loan term to allow you to catch up on payments. A shorter term or better interest rate allows more money to go toward your principal – the actual loan amount versus interest.

Make a Lump-Sum Payment

Get out that calculator!

Determine the amount of negative equity you have and, if it won’t cause financial hardship, pay it off in one lump-sum payment. If that doesn’t fit with your situation, consider making extra payments each month. This will help you build up the equity faster and get you back on track.

While paying to get right side up again may seem intimidating, know that the positive equity can result in a payoff at the end of the loan term if you sell or trade in the vehicle.

Sell or Trade In the Car

If you are upside down on a car loan, selling the vehicle could wipe the slate clean. If you can’t sell the car for enough to cancel the negative equity, you may still need to pay the difference.

Trading in your vehicle is also an option. But you have to be careful with this strategy. If you trade in a car with negative equity, you could end up with another car with immediate negative equity. This can trigger a cycle of debt and signal a problem to lenders.

Instead, make sure you get rid of the negative equity before trading in your car or trade-in for a car that is priced at a lower value.

Steer Clear of Upside Down Loans

The best defense against an upside down loan? Knowing how to avoid it! Here are some ways to prevent owing more than your car is worth:

  • Make a Down Payment: As previously stated, a down payment can offset the cost of the loan and keep your head above water.
  • Shorter Loan Terms: Longer loan terms may equal smaller monthly payments but it also gives your car time to depreciate. The shorter the loan term, the less you’ll pay in interest over time.
  • Choose Wisely: Do your research! Make sure the vehicle you purchase will retain its value over time.

Avoid Upside Down Loans With SeaWest

Getting in a tough spot with your car loan can happen to anyone. At SeaWest, we know you have busy schedules and important commitments. We are here to make sure you know what to do if you find yourself upside down on your car loan – and how to get back on track quickly and responsibly.

SeaWest is proud to offer our members car loans with competitive rates and excellent customer service. We can help you with the cost of insurance, taxes, and license. Plus, our loans come with the option to add guaranteed asset protection and mechanical breakdown protection.

We are the only credit union built for members of the Coast Guard and their families. We understand your unique situation and needs. Let us help you stay financially on track no matter the circumstances.

If you’re upside down on a loan and considering a refinance, SeaWest can help! Find out more about when it makes sense to refinance.



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