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How To Avoid Or Get Out Of An Upside Down Car Loan
By EchoBay Loans Staff Writer

Being the holder of an upside down car loan can be a financially devastating experience. With as quickly as cars depreciate, it is easy to find yourself in this situation. Have you ever heard that your car loses up to 15-20% of its value as soon as you drive it off the lot? If you were enticed by no money down, you could be in an upside down car loan from the first day you own your car.

There are several ways to correct the situation if you are in an upside down car loan and several ways to avoid one all together. We will examine both of these situations.

p>How to get out of an upside down car loan
If you are in this situation, it will take a little work and a lot of patience to right the loan again.

1. Keep the car until you are right-sided in the loan.
As much as you may want a new car, the best decision is to keep your existing vehicle until you no longer have an upside down auto loan. When you trade-in your existing vehicle, you will likely only make the situation worse and be even more upside down in your loan. Not only will you owe more, you will also have a higher interest rate since you will be financing more than the vehicle is worth.

2. Sell the car yourself.
If you must go ahead and sell you car, do not trade it in at the dealership. The car dealer typically offers the least amount of money for you car as they have to leave themselves enough of a cushion to turn a buck when they sell it.

If you sell your car privately, you will be able to get more for your car. There are several advantages for the buyer as well such as a better deal than at the dealership and no hidden fees that are typically charged by a dealer.

3. Refinance the interest rate.
In some cases, a borrower can quickly get out of an upside down auto loan by refinancing the loan. This is particularly true if the car was originally financed at a high rate or interest rates have fallen since you bought the car.

While the interest rate does not change the principal amount of the loan, it will enable you to pay down the principle faster. In all loans, your payment is first applied to interest due and any remaining is applied to the principal balance. Particularly in the beginning of the loan, almost all of your payment goes towards the interest due. When the interest rate is lower, there is less interest due resulting in a quicker reduction in principal.

How not to get into an upside down car loan
There are several ways that you can avoid ever being in the expensive situation of an upside down car loan.

1. A down payment of at least 20% is a must
Because a new car depreciates by as much as 20% as soon as you drive it off the dealer's lot, it is very important that you make a down payment of at least 20% when you buy a new car. By having the car paid down this much already, you run a much lower risk of ending up upside down.

When you make a habit of doing this, you can virtually eliminate the risk of ending up in an upside down car loan. This should ensure you always have a car that is valued at more than what is owed on it. When you decide to sell this car or trade it in, you should be able to use the difference in the price and the payoff for the down payment on your next vehicle. This keeps you from having to come up with several thousand dollars in cash for each vehicle purchase.

2. Take out the shortest-term loan you can afford
Many people end up with an upside down auto loan simply because they extended the payments over too long of a period of time. Generally, you should never finance a car for more than five years to help to avoid being in a negative car value situation. If you are comfortable with payments amortized over four years, you will be in even better shape.

While it is important to keep your loan to the shortest term possible, do not do this to the point where it will be difficult to make your payments. This payment is one you will have for several years and you need to be comfortable with the payment amount. It would be better to be in an upside down car loan than to not be able to make the payments and have a repossession on your credit report.

3. Payoff your current loan first
You need to payoff any debt remaining on your current car first. If you roll debt from your first car into your new purchase, it will be difficult to avoid an upside down car loan. Be sure that you can either pay it off first or the sale or trade-in value covers the payoff of your car.

4. Buy used instead of new
Because new cars depreciate so quickly, you can buy a used car and save thousands of dollars. The used car has already undergone the first year of depreciation, which is generally the steepest amount. As long as the car has low mileage, a used car can be a great deal for many people. It can also offer many people the ability to afford what is their dream car because of the drastic difference in price between a used and a brand new car. Many dealers offer certified used cars and you can always take it by a mechanic you trust to check it out before you buy.

Avoiding an upside down car loan or getting out of one you are already in is possible if you follow these tips. The best advice is to be smart when it comes to purchasing your vehicles so your can avoid the situation all together.

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