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How to Get Out of an Upside Down Car Loan

By Liz Opsitnik
Sunday, Aug 09 2009 20:58

If you’re currently upside-down on your auto loan, which means you owe more money on your car than it is worth, not too many dealers nowadays will allow you to roll the amount you owe into a new car loan.

Then you’re stuck with a vehicle and auto loan payment you either can’t afford or don’t want any more.

One solution to being upside-down on your current auto loan is to use a cash rebate being offered by the manufacturer to pay off your trade-in vehicle. Instead of putting the cash rebate directly toward the new vehicle, buyers can use it toward paying off the loan on their trade-in car.

“The manufacturer offers rebates to cover people who are upside-down,” says George O’Sullivan, e-commerce director at Thoroughbred Ford in Kansas City, Mo.

Upside down on your auto loan? Try using a cash rebate to pay your car loan off to help you get a new car.

Here’s how it works. Say someone is $4,000 upside-down on their current auto loan, meaning the difference between the balance they owe on the car and what the car is currently worth is $4,000. The customer wants to buy a used car for $20,000. There wouldn’t be any cash rebates on that car because it’s used.

So the dealer would add the $4,000 from the upside-down trade-in vehicle to the $20,000 used car and the amount financed would be $24,000.

“This would be a 120% carry,” O’Sullivan explains. “The bank has to agree to loan you 120% of the value of the vehicle just for you to get qualified.”

Here’s the scenario if the customer wanted to get a new car. Let’s say the new car has an MSRP of $22,000 and an invoice price of $20,000. This model has a $4,000 cash rebate. The customer has the same trade-in vehicle that is currently upside-down by $4,000.

“This would be a 100% carry,” O’Sullivan says. “The rebate would cover the amount that the customer is upside-down on the trade.”

If the customer has no trade-in car and wanted to buy the same new car at $20,000, he or she would pay $16,000 because of the $4,000 rebate.

 “Cash rebates are especially helpful when the model year is over and the dealer is trying to get rid of old inventory,” O’Sullivan says. “When the new car comes out, the new model will have less incentives and the old model will have the bigger rebate.”

O’Sullivan says the rumor that you can’t trade-in a car you still owe money on or are upside-down on is not true.

“Dealerships will always let you trade-in a car you owe money on if they can find a bank to do the deal,” he says. “If buyers are upside-down, it depends on how far upside-down they are. It’s easier to get approved for a car loan if they are upside down only $1,000 or $2,000 versus being upside down $5,000 to $10,000.”

If a consumer is stuck with a car loan that is really under-water, they do have some options.

“If the buyer is upside-down that much, they should have more cash to put down and look for the really big rebates. To get the bank to carry over the balance on the old auto loan, it also depends on their credit score. If they have an 800+ score, nobody cares and they can still get approved. The more you try to carry over, the higher the interest rate will be.”

So if you’re currently upside-down on your car loan and want to use it as a trade-in on a new or used car purchase, you do have some options. Shop around, see where your credit is at and look for the big rebates. A big rebate can be used to cover your upside-down auto loan, so you may find that a new car with a big rebate will be a better deal for you than buying a used car with no cash rebate.


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Confused or unsure about some of the car loan terms used in the article? Click here for our Auto Loan Glossary.




21 comments on this story so far.

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Comment By: Laurel on Tue, Aug 18 2009 at 1:55 PM
i found a used car for 5995.00 and my pay off amount as of 07/19/09 is 7269.96 on my current car. I dont think i have good crdit either. Would it be smart to trad in my car? or will that have me too far upside down? also, what intrest rate is more realistic for me as well if i have bad credit?
Comment By: on Tue, Aug 18 2009 at 2:05 PM
What is the value of your current car from Also, what range does your credit score fall in? We need a little more information before we can give you some advice on your situation.

Remember too that rebates are only for new car purchases, as they come from the manufacturer. There won't be any rebates on the used car you're looking at to cover the amount you're upside down on your current car. You'll still owe that amount. The dealer will only give you whatever they think it's worth for trade-in value.
Comment By: Mark on Wed, Aug 19 2009 at 4:32 PM
I'm currently making payments on a 2007 Jeep Liberty Sport 2WD, and I want to get myself out of it. The car runs great, but there are a lot of issues with the car that although the warranty covers the repairs, it's just really annoying that I'm paying for a car that's not "perfect". The current payoff is $22400.00, and the value of the car (as appraised by Car Max) is $9000.00. So, I'm under by $13400.00. Do you think it's a good idea, or smart idea to try to get into another car? I can probably put down $3500.00.
Please help me and set me straight!
Comment By: on Wed, Aug 19 2009 at 5:09 PM
What was the original loan amount for the Liberty? What interest rate are you paying? How many miles are on the Jeep? Also, how many months is your loan for? We need a little more info to give you the best advice.
Comment By: Mark on Wed, Aug 19 2009 at 5:30 PM
The original loan amount was around $34k...I can't recall the specific amount; it was over what the car was originally selling for because they had to roll-over the negative equity from my last car. The interest rate is 16% (I have bad credit, but I'm am trying to repair it). The Jeep currently has 22k miles on it, and my loan was for 6 years/72 months. I'm looking to get into a Honda Fit for about $18k.
Comment By: Mark on Wed, Aug 19 2009 at 6:08 PM
The original loan amount was I believe $37k.....I'm not quite sure because they had to roll in the negative equity from my last car. The interest rate is at 16%, and it has 22k miles on the odometer. The loan is for 72 months.
I'm looking to get into a 2009 Honda Fit and I want to see if it's even worth trying to work it out with a dealership or if they are going to shut me down.
Comment By: on Thu, Aug 20 2009 at 10:31 AM
There is a slim to none chance of you being approved for another auto loan right now, especially since you have so much negative equity to roll over. Lenders aren't allowing consumers to roll over any negative equity into a new auto loan, let alone $10,000+. The recession has tightened the credit criteria up so much to get approved for a loan now. You really only have one option in your situation. You'll have to keep paying the loan until it is paid off in full in another four years.

I'm surprised that a lender allowed you to roll over more than $10,000 into the loan for the Jeep Liberty in the first place. This is rare and really unheard of. If you don't make your payments, your bank or lender is going to take a big loss on this deal. They stand to lose about $25,000. This is why your interest rate is so high, because you are a big risk for the lender. Even if you sell the Jeep private party, you won't get enough to pay off your loan.

Remember too if you decide to stop paying all together and go the repossession route, you will ruin your credit and won't be able to buy the Honda Fit you are considering. If you like to change cars every few years, a lease would have been better for you.

The bottom line is that when you roll over negative equity into another auto loan, you just dig the debt hole deeper and make it really hard to get out of. Credit experts always suggest that consumers never trade in a car that isn't paid off. If you are trying to repair your credit, just bite the bullet and keep paying until it is paid off in full. And definitely don't buy another car until the Jeep is paid off.

Sorry to be the bearer of bad news, but there really are no options in your situation except to keep paying on the loan. If you pay on-time, every single month until it is paid off, you will greatly improve your credit score, so when you buy your next car, you will probably qualify for a better interest rate. Good luck!

Comment By: Mark on Thu, Aug 20 2009 at 1:28 PM
Thank you for your advice.

I won't even bother wasting my time by going into a dealership to try to see if I can get approved. My car will be paid-off by May of 2013, so I think I will just bite the bullet like you adviced and pay it off.

Perhaps this is how I'd learn my lesson.

Thanks again!!!
Comment By: PATRICIA JAMES on Mon, Aug 24 2009 at 1:30 AM
My name is Pat, and to say I have a car loan that is under water is an understatement. I had a loan on 2004 ford focus, that I managed to pay down to the last $4,000 by the beginning of 2006. At that time i stupidly traded my 2004 in for a 2006 ford focus, and almost immediately knew I had made a major mistake. The quality of the newer car was less, no service contract as in first car, no road side service, nothing. My dealership went out of business within the year. and my job and health took a turn for the worse. I live in Los Angeles, where a car is mandatory. My car note alone is over $415 per month, my interest rate in 21.14% and when my payment is late the interest is compounded daily at that rate. I have paid over $14,000 to date, and still owe $12,743.46, as of 08/03/09. The 2006 ford focus value is between 5,000 to 7,000. Why would I pay another $12,000.+ for a car worth less than $7,000. In another three years the car won't be worth s---. This is the kind of penalty poor people must pay for being poor. It's not I don't want to pay. It seems just a little out of proposition. Are you going to tell me I really have no options??? Is this not considered predatory lending?? What can be done about this?? Oh, by the way, credit is already in the crapper. Been a single mom all of my adult life, adopted two kids when I was still a kid myself.
Comment By: Toya on Wed, Nov 4 2009 at 6:33 PM
I have the same problem as you I reported my problem to the BBB I still have time left to hear from them. I have a 2004 gran am and it was purchase for 11,000 and I had 5 years on it. When I get through with this car it will be 20,109 I am paying 9000 in interest this is a shame on how people do women. I wish I hear something good back from them soon.
Comment By: andrew on Fri, Sep 4 2009 at 12:39 AM
hi my name is andrew, i have a 2001 bmw that after trade boasts a 6500 payoff, the car i was looking at is only about 1000 above what the car is worth, the bank requested 7000 down in order to get the loan with almost an 800 credit score! there telling me that i need to pay off my trade basically in order to get into the new car.. any ideas? i do Not have the 7000 to put down
Comment By: on Fri, Sep 4 2009 at 4:26 PM
How much do you owe on the 2001 BMW? Also, what car are you considering and how much does it cost? We need a little more info before we can give you advice.
Comment By: pjf on Sun, Nov 8 2009 at 5:42 PM
is it possible to pay loan off faster by increasing monthly payments
Comment By: on Mon, Nov 9 2009 at 3:02 PM
Read our story about car loan payment acceleration. It outlines all the information and pros and cons of paying extra every month.
Comment By: shannon on Tue, Nov 10 2009 at 9:00 AM

hi, i currently have a honda civic 2006 and good shape the only problem is i owe 14,0000 on it and the car is worth about 8 to 10 grand, which means i have negative equity i want to trade the car in for a vehicle that cost about 30 grand. i hate my car so much but do you think its a good idea for me to trade in now and if i do would i be upside to much. please help

Comment By: on Tue, Nov 10 2009 at 4:29 PM
Since you are upside down about $5,000 on the Civic and want to upgrade to a more expensive vehicle, you will have to cover that $5,000 somehow. Try to find a car with a cash back incentive close to $5,000. Also, if you can come up with the money yourself, you have a better chance getting approved for the new car's loan.

Right now, lenders aren't really allowing people to roll over negative equity into a new car loan. If you can give them a large down payment so you lessen the lender's risk, you'll stand a better chance.

You may also want to try and sell it privately to get out of the vehicle. Honda's tend to have good resale value, and the used car market's inventory is low right now, so you may be able to get a little more than normal for it.

If you aren't able to come up with a decent down payment for the new car, you may not be approved for the financing, especially since it's a big difference in price compared to your current car.
Comment By: Josh on Sun, Feb 28 2010 at 2:45 AM
I currently have a 2004 nissan sentra spec v.I owe 11,000 on the loan,but i'm looking at trading it in for a new car in the 25-35,000 range.I was wondering how easy it would be to get approved.I have a credit score of over 700 and i can afford up to 10,000 down.
Comment By: on Mon, Mar 1 2010 at 9:48 AM
It shouldn't be a problem with your high credit score and big down payment, but the lenders also look at the PTI ratio, or payment-to-income ratio, among other things. They will look at how much you make compared to how much your new auto loan payment will be.

Also, if you are upside-down on the Nissan, it will be hard to roll that balance over into the new loan. A large down payment will help though. If you owe $11k, it looks like you're going to be upside-down, since the value is only about $5,300 on the car. Look up your value on and if you find that it is worth a lot less than you owe, you may want to try selling it privately and pay off the remaining balance.
Comment By: aj on Thu, Mar 18 2010 at 5:36 PM

hi my husband and i are up side down on our 04 toyota and the kbb is between 8500 and 10000 but we owe 18 on it bought it used and i have no credit and his is like 29. what should we do we have two small kids and need a bigger auto

Comment By: on Fri, Mar 19 2010 at 3:57 PM
You still owe $18,000 on the Toyota or that was the total loan amount? If you still owe $18k on it, that means you are upside down 8 to 10k. Unfortunately, you'll have a hard time rolling it over into a new loan. You can always sell the Toyota privately and then pay off the remaining amount out of pocket. Or you can trade it in at the dealer and cover the upside down amount yourself. The only other option is to just keep paying on it until the upside down amount levels off a bit.
Comment By: takisha on Sat, Mar 20 2010 at 4:12 PM

I am currently making payments on an 05 ford taurus it has negative equity but i am trying to trade in

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