Archive for July, 2014

Are There Other Upside Down Car Loan Options Besides Refinancing?

Upside Down Car LoanWhen you have bad credit and you try to trade in your car on a new one, you may find that your current car financing situation has left you in an upside down car loan. This means that you still owe more on your car than the vehicle is currently worth. This can be a nightmare for the prospective buyer; many people refinance their debt to keep payments manageable, but that doesn’t solve the problem of needing a new car, and the shorter term of a new refinance can result in much higher monthly payments that can lead you into more trouble.

The question is, are there other options available besides refinancing? There are several, in fact, and each carries its own risks and benefits.

 

Seek Incentives to Cover the Loan

Sometimes, you can find a good deal on new car financing which will carry enough incentives to cover the amount you still owe on your old car. This is an ideal trick. The incentives cover everything you owe, leaving you clear to begin payments on the new car. The problem with this is that your new car may lose value faster than one that isn’t “incentivized,” which could see you end up in another upside down situation later.

 

Wait before Trading

If you can manage it, hold on to that old car for awhile and continue to pay down the loan. Eventually, the debt and value will normalize and you can then get back on top of your financial situation. The down side comes if your current vehicle has high mileage, or needs a lot of repairs. That means you might not get much value out of the vehicle. However, if you are thinking of refinancing, just use those bigger payments to pay down your principal faster instead.

 

Roll Over Debt

This is similar to refinancing, but in this case you let the dealer selling you a new car roll over the extra debt you owe into your new car loan. This allows you to get your new car and drive it home, but carries the disadvantage of a higher principal and probably a much longer-term loan. You’ll pay more interest over time, which may not be ideal.

 

Repossession

Some folks may consider letting the dealer or bank repossess their car. You will be out from under the responsibility for your old car, but put bluntly, this will destroy your credit rating and should not be considered in any but the most extreme of cases. This newly-harmed credit rating will affect your ability to get new car financing; at the very least you’ll end up with a sub-prime interest rate. At worst, you may not be able to get financing at all.

While none may be 100% ideal, there are other options besides refinancing if you are in an upside-down loan. With patience and research, you may even get back on top of your financial game.

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