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How to effectively manage an upside-down car loan

How to effectively manage an upside-down car loan

Thanks to coronavirus, more people than ever are having to manage an upside-down car loan. A loan where the car’s value is less than the outstanding loan amount. So how can you manage a loan like this? What are your options?

Despite a global economic slowdown, car prices have remains fairly steady. Some have even increased over the first half of 2020. With more borrowers opting for longer loans and car depreciation remaining steady, it’s easier than ever to hit negative equity.

We call negative equity an upside-down car loan in the trade. Where the outstanding amount you borrowed to buy the car is more than the car is now worth.

So what can you do?

Plan to keep the car for longer

The simplest and cheapest way to handle an upside-down car loan is to keep the car for longer. Rather than sticking to the 2-3 year replacement routine that many of us use, plan to keep the car for an extra couple of years.

This will gradually align the car loan so that the outstanding amount eventually becomes lower than the car’s value and you’re on the right side again. This is a longer term plan and means looking after your car well but is the easiest way to manage the situation.

Make overpayments

If you’re fortunate enough to be in a position to overpay your car loan, you should. It is faster than keeping the car and will see you the right way up on the loan over time. This method has the added advantage of paying off the car loan early and perhaps saving money on interest payments.

Of course, not everyone can overpay a car loan and some loans have limits on the amount you can overpay.

Use cash rebate offers

If you absolutely must change your car, look for cash rebate deals. If you can find a generous rebate on a car you like, it could be the difference between being upside-down and the right way up. Once you’re right, securing a new car loan becomes much easier.

Cash rebates aren’t available on every make and model and many aren’t enough to cover an upside-down car loan though so shop carefully.

Save up a larger down payment

If you want to change your car, save up a larger down payment for the next one. You will need enough to cover the upside-down amount plus have a decent down payment for the next car. If you can do that, you can make everything right for the next car loan while also having a decent down payment.

That down payment could prevent you from going upside-down in your next car loan too. Again, not everyone is going to be in a position to save thousands of dollars for their next car but if you can, you should!

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