How To Escape An Upside Down Car Loan

by Silicon Valley Blogger on 2012-10-2216

Do you really know how much it costs to own your car? Is your car loan upside down or underwater? Here are some thoughts on the subject.

I often wonder what it’s like to drive those fancy new cars. You know, the ones with the flashy paint and the equally flashy price tag. But, I stick with my paid for 1994 BMW 3 series that I bought with cash. It has 177,896 miles on it, some scratches on the paint and a sunroof that needs some TLC. Why? Because I don’t want to be broke.

One reason why you could be broke is because of the amount of spending done on expensive high ticket items without a careful analysis about the true costs involved, especially when it comes to a seemingly innocuous asset parked right outside your front door. If you look at those who are hopelessly overextended, there’s more to their plight than just troubled mortgages or maxed-out credit cards.

How Much Do You Spend On Your Car?

When it comes to spending on an automobile, of course, some do it in the name of fuel efficiency and being green, while others do it because they need bigger, faster, or simply newer cars. The notion is that we are what we drive. What a load of BS. According to the US Census Bureau and the Bureau of Labor Statistics, the average American family is spending $8,600 a year on cars.

These surveys let us know that the average middle class American family is spending up to 20% of their take home pay on car payments alone. This doesn’t count what they have to spend on insurance, maintenance, gas, and whatever else tickles their fancy. That’s almost as much as the current guideline on what you should spend on your house!

upside down car loanUpside down on your car loan? From Aparatoc.

Car Loans Are A Drag

So is it the price of the vehicles that’s driving this trend, the average length of the financing contract, interest rates or all of the above? Looks like “D-all of the above” is the answer. According to, over 90% of new car loans and 81% of used car loans are longer than 4 years. I thought that 5 years was the norm, but apparently somewhere in between 5 and 6 years is the average length of a car note. Of course, these longer loans make financing an attractive proposition since the payments are so low, but what many buyers fail to realize is that the amount of interest paid on the loan coupled with the amount of time the buyer spends being upside down in their loans (owing more than the car is worth) makes these loans a costly option.

The second driver in the high cost of vehicle ownership is the number of loans that begin with negative equity. This is what happens when an unpaid car loan is rolled into a new car loan when the old vehicle is traded in. It’s what really happens when the dealership offers to pay off your car no matter how much you owe. This part of the loan is not secured by the new vehicle and can cost as much as double as the rest of the loan. This portion of your loan is also not covered by insurance if your car is stolen or totaled, which can be even more devastating to your bottom line if you have to pay out of pocket.

How To Escape An Upside Down Car Loan

Maybe you’re tired of making car payments. So, what can you do to get yourself out of car loan hell? Believe it or not, you do have options. Let’s take a look at what you can do (some methods are more radical than others):

1. Sell your car? If the car you own is a big money pit, then you may have to consider unloading it for something that’s much more manageable, financially. If you can actually pay off your car with the proceeds from selling it, plus pay cash for something more affordable, then DO IT. This is the single most effective way to reduce your vehicle costs. Granted, this solution may not be the easiest one to swing.

2. Refinance your car. So, you’re still upside down on your loan. See if you can refinance the loan. If you have decent credit, this shouldn’t be a big deal. If not, you may not qualify.

3. Repossession. This is the worst case scenario. Your credit will take a huge hit, plus you’re usually still on the hook for the difference between what you owe and what your car sells for at auction.

4. Drive your car until you can sell it. This is usually the best option for individuals who are upside down in their loans. Continue making your payments until the loan has reached the point to where the balance can be paid through selling the car.

Getting out of your current payment situation is only half the battle. Buying a car can be tricky, but doing it smartly is even more vital to your future financial well-being. Stay tuned for more information on how to purchase your next vehicle without breaking the bank.

Created June 7, 2010. Updated October 22, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.

{ 16 comments… read them below or add one }

ConsumerMiser June 7, 2010 at 8:09 pm

Like the post. All 3 of my cars are paid off and I paid them off early. One car I bought new (the first new car in my life) and the other 2 cars I bought used. I plan on keeping these cars until they are AT LEAST 10 years old or 200,000 miles, whichever is later. Car loans are a drag! BTW, I see you have a 1994 BMW. Wow, impressive frugality. I like it. I recommend buying used (at least 2 years old or more) to get value since new cars depreciate so quickly.


Silicon Valley Blogger June 7, 2010 at 9:11 pm

All our vehicles are also paid off. In fact, we pay for them in full! We set up a car budget well in advance so that when the time comes and we need to replace one of our vehicles, we’re ready for it. In the past, we had decided to replace a car at the 100,000 mile mark. Recently, we’ve changed our plans and now have decided to drive all our cars to the ground to save money. If we can somehow sell them off even after this point, then all the better. At the same time, we sock a certain amount of money per month for our future car fund. We try to be as proactive as possible so we can avoid surprises!

Kosmo @ The Casual Observer June 8, 2010 at 7:52 am

I usually try to shoot for about 135K miles to avoid the nickel and diming that can occur later in life (although it does take quite a few nickels and dimes to add up to that amount.

We also do the car budget. We’re scheduled to replace the 98 Contour next year, and should have enough in the fund to pay for it in case (as we also did with our last car purchase).

The “we’ll pay off what you owe” ads always crack me up. I guess some people don’t realize that it just gets rolled into the loan? The ads with the yellers, screamers, and guarantees generally turn me off on a dealer. We buy through a guy about a half hour away in a smaller town. The ads for that dealer could probably be best described as “bland”, but that’s fine with me. They don’t play games and try to BS you. Heck, I don’t even think they use inflatable gorillas to draw attention.

Kosmo @ The Casual Observer June 8, 2010 at 7:53 am

“and should have enough in the fund to pay for it in case ”

pay for it in CASH.

Impulse Magazine June 8, 2010 at 9:00 am

The best situation for this is sell the car back to the dealer and renegotiate new loan terms

Darren June 8, 2010 at 11:10 am

Agree that getting out of a bad car payment situation is only half the battle. It’s a band-aid fix that doesn’t heal a deeper issue – spending habits that aren’t conducive to building wealth.

Maybe these people should read The Millionaire Next Door and consider quality used cars!

Wasn’t aware of the upside down car loan concept. That’ll just mess up your financial condition.

Donna Freedman June 8, 2010 at 12:40 pm

My best friend’s car is 15 years old and has more than 167,000 miles on it. She will keep driving it until the wheels come off. Regular maintenance has kept it running quite well, even though she lives in Alaska cold weather is tough on cars.

I’m currently house-sitting for her and have permission to use the vehicle. It’s a pleasure to drive. I can’t actually believe it’s as old as it is.

Everyone in my family keeps vehicles forever. Collectively, we’ve had good luck in avoiding repair-prone models. There’s something satisfying about driving a car that’s 12 years old (or older). It doesn’t owe you a thing at that point but it keeps on chugging. The insurance goes down, too.

CreditShout June 8, 2010 at 1:51 pm

This is great advice! Car companies and dealerships make it seem like owning a new car is so affordable but there are so many hidden costs. I hope your “experienced” car lasts you a long time!

FH Dodge June 8, 2010 at 5:05 pm

Buying used cars with cash is a great way to save on the loan side. Paying hefty interest rates for 3-5 years can add thousands to the cost of a vehicle.

Repair bills can also add to the yearly budget when a car gets up there in age. It’s important to be able to cut your losses when the repair bill is outweighing what a car payment would be. If you are sinking $500-$1000 every time you visit a mechanic, it might be time to think about getting a more reliable car.

Stella June 9, 2010 at 12:31 pm

Car loans ARE a drag–but if you’re only making a minimal down payment or trade-in, you’re pretty much in upside-down status once you drive off the lot in a new car aren’t you?

Car guy June 9, 2010 at 2:37 pm

As you can see by my name I may well have a soft spot for shiny, fast cars. However this doesn’t mean I am totally stupid and run around throwing my salary at car dealers and buy the fastest thing I can afford.

At present I drive an Audi A3 diesel which is just 3 years old, here are a few frugality tips that I’ve picked up in my experience of car buying:

Consider what fuel type you’re buying, you can shun diesel all you like but the fact is I can acheive 60mpg on a highway run and have enough torque to give some more powerful petrol cars a scare because of the torque my car has.

I never buy a car new, to be honest I can’t afford it and the depreciation that occurs the second you take ownership genuinely scares me. Although the car may not be brand new it’s as good as and my wallet hasn’t taken quite as much of a beating.

Consumermiser June 9, 2010 at 5:32 pm

Love the idea from Silicon Valley Blogger and Kosmo regarding a specific car budget to replace the old car that you nearly drive into the ground. Also, enjoyed reading the other comments, especially from Darren and Donna.

We all seem to agree. Where are all the folks that just have to have a NEW car every few years or prefer to (heaven forbid) LEASE!?!?!?!

Dani June 16, 2010 at 3:02 pm

The only way to escape car loans is to pay them ASAP, and never, but NEVER take them again!! there is so many ways to save money and to buy a good used car!!

Every time you guys are considering taking a car loan, remember, they sell you the car at the most highest price possible, and they make money on the loan!! Lets stop this craziness !!!

Ken Harrop June 25, 2010 at 7:08 am

If you’re considering taking a loan out for a car, you may want to consider leasing instead. Fixed costs over the 3 years and you can end up paying less than what the car would have depreciated to, had you bought it outright!

Derek - Freeat33 October 26, 2012 at 7:06 pm

Don’t just buy a “cheaper” car on sticker price alone. Remember to consider fuel efficiency. According to Fuel Economy dot gov the average driver spends $1700 per year for a 2004 Honda Civic getting 34 MPG and $3600 for a Chevy Silverado 1500 2wd of the same year just in fuel costs. According to Kelly blue book , we own our cars for 3-5 years. so don’t just get a gas guzzler because it is $2000 bucks cheaper on the sticker.
Get a fuel efficient ride because over five years it will save you $9500 in fuel. Then if you really want to kick financial teeth, then take the $9500 and buy another car with it in five years! It’s the gift that just keeps on giving.

Pankaj Tyagi October 30, 2012 at 9:41 pm

One cost to consider is the cost of maintaining the car, especially if it has parts coming from all over the world. Most people do not realize the true cost of a service. They are happy to look at the $0 invoice for a maintenance during the warranty period and never wonder what it will cost when you go past that 50K/5 year mark. A basic visit to the dealer may cost you $100 just to “diagnose” the problem. And then it goes up from there. It is a decision point when you have to decide between another $2-4K for extended warranty from the manufacturer or selling and buying a newer car. If your car is a gas guzzler and you want to move down to more fuel economical car (and there are many new ones out there which look really cool) then you may go one direction. If you are like me and want to run the car into ground over 10 years then extra for warranty may be worth it. These are some fo the personal financial decision that require some thinking.

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