Getting Out of an Upside Down Car

by Gary Foreman

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A few years ago, my credit was in bad shape and I needed a van. The salesman at the car lot said he could put me in one. I bought it thinking it would give me a chance to reestablish my credit. They overcharged me for the van. I owe $16,000, but the van is only worth $8,000. I want to get rid of it but don't know what to do. I'm upset with myself that I let myself get taken in like that. I want to go public about the dealerships hurting people with credit problems, but I'm ashamed that I was used. What can I do about this van?

Patty is in a pretty deep hole. But she does have plenty of company. A Money Magazine survey showed that nearly 30% of new car shoppers were upside down in their current car loans. And, yes, Patty's right that some car lots take advantage of buyers with poor credit. Let's try to do two things. First, let's see what options Patty has available to her now. Then we'll look at what she can do to avoid similar problems in future deals.

There's probably little that Patty can do from a legal standpoint. She can check with State Consumer Affairs office. If she has any legal recourse, they'll tell her.

Patty needs to decide why she wants to get rid of the van. The unfortunate truth is that she may need to keep it for awhile until the payoff is closer to the value of the van. If she's having trouble making the payments, selling the van won't help. She would still owe the lender $8,000 after the van is sold.

Trading for a different car isn't likely to help either. She'll owe more on the new car than it's worth. So she'll be upside down in that car, too. And will remain that way for quite awhile, especially if she tries to get lower monthly payments. So unless she plans on trading for a car that's worth much less than her van, that won't solve the problem.

The best way to get out from under an upside down loan is to keep the car as long as possible. The longer she hangs on to it, the closer the value of the van is to the amount owed. If she keeps it until the loan is paid off, she'll know for sure that she owns more than she owes.

Refinancing could reduce her payments. Before she starts shopping for a new loan, she should check to find out whether she can pay off the existing loan early and whether an early payoff is penalized. Also ask if the lender will renegotiate the loan. If she can pay it off early, she'll want to know what interest is being charged on her current loan. Then she can shop for a cheaper rate or longer loan. Get a copy of your credit report before you start shopping. (Equifax, PO Box 740241, Atlanta GA 30374-0241; 800-685-1111) Show potential lenders the report. Do not let all of them request your credit score. That will tend to lower it.

The worst choice would be to let them repossess the van. The van would be sold at auction. The sale price will not cover the amount owed. Patty will still owe the difference. Now that we've outlined Patty's options, what can she do to avoid being taken again?

Car deals are complicated. It's always easier to understand what's going on if you break things down into smaller, simpler pieces. You're actually handling three separate transactions. First, you're buying a vehicle. Second, you're buying a financing package. Third, a trade-in means that you're selling a car.

Perhaps Patty didn't overpay as much as she thinks. It's possible that the car lot gave her a better interest rate than she deserved but made up for that by charging more for the car. Unless she separately negotiated the van's price and then the financing, it's pretty hard to tell. When you have bad credit and need a car, you're at a distinct disadvantage. Walking into a car lot is the worst way to get new wheels. The first thing that Patty should have done is to find financing.

After you've found a loan, then find out the price of the car that you're considering and the value of your trade-in. There are magazines and websites that will provide new and used car prices.

Finally, don't finance a car for longer than you expect to own it. The longer the car loan, the more likely you are to be upside down in the loan.

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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