How to Get Out of an Upside-Down Car Loan

If you’ve got an upside-down car loan, you’re not alone. In fact, the number of drivers who owe more on their car than it’s worth continues to go up.¹

But no matter how underwater you are on your car, you can come up for air! Let’s talk about how to get out of an upside-down car loan once and for all.

How to Get Out of an Upside-Down Car Loan

Being upside down on your car loan is frustrating and can be downright scary. Not only are you continuing to lose money on the car as it depreciates (or loses value), but you also run the risk of missing payments and having your car repossessed.

The good news? There are steps you can take to get out from under it. Here’s what to do:

1. Calculate the negative equity.

First, you need to know how deep of a hole you’re in by calculating your negative equity. Just take whatever you still owe on your car and subtract the amount you could get for your car if you did a private sale. (A quick search on Kelley Blue Book will let you know.)

Remaining Loan Balance – Private Sale Value of Your Car = Negative Equity

2. Decide if you want to sell the car or pay off the loan early.

Once you know exactly how much you’re upside down on the car loan, you’ve got a couple of options. Let’s look at each one so you can decide the best course of action for your situation:

Option 1: Sell the car and get a personal loan for the difference. 

If you want to quickly get out of an upside-down car loan, you can sell the car and take out an unsecured personal loan for the difference to pay off the car loan.

We normally wouldn’t tell you to go into debt with a personal loan. But in this case, it can help you get out of a bigger mess and keep the car from dragging you even further underwater. Plus, you’d (hopefully) have a lower interest rate with a personal loan.

You’ll get more for your car if you do a private sale (you can advertise on sites like Craigslist or Cars.com), rather than selling it to a dealership. You just need to let the buyer know you’ll have to pay off the car loan first before you can give them the title.

You can even meet the buyer at the lender’s office to speed up the process. That way, you just use the money from the sale (plus the personal loan you took out to cover the difference) to pay off the car loan. And then as soon as the bank gives you the title, you can hand it to the new owner.

You’ll also need to find a cheap replacement car you can drive temporarily while you save money to buy a better car down the road.

Option 2: Save up the difference and then sell the car.

If your credit score is too low to get approved for a personal loan, you can hold off on selling the car until you save up enough money to pay off the difference. Just be sure to keep making your car payment each month while you save.

There are plenty of quick ways to save up the cash you need to cover the difference—get on a budget, cut extra spending, or pick up a side hustle. Whatever you do, don’t slow down! Because remember, as long as you’re underwater, you’re losing money. You want to get this loan out of your life!

Option 3: Keep the car and pay off the loan early.

If you want to get out of an upside-down car loan but you don’t want to sell your car, you could decide to pay off your car loan early.

But first, you need to ask yourself a couple of questions:

• Can you pay off your car in less than two years?
• Is the total value of all your vehicles less than half your annual income?

If the answer to either of these questions is no, you’re better off selling your car. If the answer is yes to both, make paying off your loan a priority. The faster you do it, the more money you save and the sooner you’ll be free of your underwater car loan!

So, those are the three ways you can go about getting rid of an upside-down car loan. Whichever route you choose really depends on your specific situation. But ultimately, your goal is to ditch the car or the loan as fast as you can!

3. Pay off any remaining debt.

You’re not truly free of an underwater car until you deal with all the debt related to it. So, whether you’ve decided to tackle the car loan itself or the smaller personal loan, it’s time to get serious about paying it off.

The name of the game here is to lower your expenses and increase your income. Where can you cut back your spending? How can you get more money coming in every month? Yes, it’s going to take some hard work and saying no to things. But it’s just temporary while you knock out your debt. Then, you’ll be home free! No more deadweight car pulling you under.

And if you want to keep from going belly-up on a car loan again, you need to buy a car you can actually afford—with cash. We know it’s not the most popular option. But it is the best one.

What Not to Do With an Upside-Down Car Loan

Trade In the Car

Trading in your upside-down car for another car may seem like a good idea at first. But here’s the deal: Trading in a car with negative equity doesn’t make the negative equity disappear—it just adds it to your new car loan. Oof.

Rolling over your upside-down loan doesn’t do you any favors. In fact, it just puts you in an even bigger hole. Instead of continuing the debt cycle, you need to break it. And that means paying off the loan in full and buying your next car with cash.

Refinance the Loan

Some people will tell you to just refinance your car loan if you’re underwater. But that doesn’t actually solve your problem! Even if you’re able to get a lower interest rate, you’ll still owe more on the car than it’s worth. You might not be sinking as fast, but you’re still sinking.

A refinance makes you think you’re doing something about your situation, so you’re tempted to slow down. But what you really need to do is have a plan to get out of your loan—and then work to make it happen!

Surrender Your Car

Maybe you think you can just give the car back to your lender and you’ll be out of your upside-down loan. But that’s not how that works.

In fact, you should never voluntarily surrender your car! Your lender will just sell the car at auction for cheap and then sue you for the difference (which will be even more than the difference you originally owed.)

We know you might feel panicked and ready to get the upside-down car off your hands. But if you plan to get rid of the car, your best bet is to sell it yourself because 1) you’ll get more money for it, and 2) paying off a personal loan or saving up the difference is cheaper and less stressful than being sued by your lender.

Borrow Money From Family or Friends

If you can’t take out a personal loan to pay off the loan difference, you might think about asking friends and family to help you out. But borrowing money from people you know gets real awkward real fast.

A parent or pal loaning you the money might get you out of the car loan. But then you’ve got an elephant of an I-O-U hanging over both your heads. Pretty soon, your friend or relative is pestering you about when you’ll pay them back and judging how you spend your money. Trust us, it’s not worth ruining the relationship over.

Get Rid of Your Upside-Down Car Loan Faster With a Budget

Whether you want to pay off your upside-down car or save up for a new (to-you) ride, a budget is how you make it happen.

A budget is simply a plan for your money. It helps you see where you’re overspending. And that’s something you need to know if you want to boost your car payment and get out of debt faster. Plus, you just feel more in control when you tell your money where to go.

Not sure where to start? EveryDollar makes it easy to create and keep up with your monthly budget. Oh, and it’s free!

It’s time to trade your upside-down car loan for peace. Download EveryDollar today and steer your finances in the right direction. The sooner you start saving, the sooner you can be debt-free and driving a paid-for car!