How Did You Get Upside Down?
Before we talk about how to get out of trouble, let’s take a look at how you got in trouble in the first place. Getting upside down on a vehicle is very easy to do. Here are some f the most common reasons.
- You took too long of a loan term.
It used to be that a 60 month loan term was long, but all of that has changed. Nowadays, it is all too common for people to have 72 month terms and 84 month terms are even now starting to make a frequent appearance.
The problem with loan terms this long is that very little of the money from your payment is going towards the principal. Your payment is almost entirely going towards interest, so it takes years to start paying down the actual debt. The actual interest rate is also higher with a long term loan, compounding the problem.
- You didn’t put money down.
Your average vehicle is going to depreciate roughly 20 percent the first year. That means that if you did not put at least 10 percent down, you are likely to be behind for several years.
This problem can be particularly bad if you choose the wrong vehicle in the beginning. Some vehicles just lose their value quicker than others. This includes economy brands and even types of vehicles like sedans. Sedans lose value much faster than more popular vehicles like trucks and SUV’s.
- You caused the value to drop.
Last, but not least, perhaps your vehicle is worth less than you owe because you hurt the value. The most common reason for this would be a vehicle accident. Even if repaired, an accident can lower the value of your vehicle. With services out there like Carfax, there is no hiding an auto accident, even if repaired perfectly.
Another way to harm your cars value is by simply driving it too much. The average car is expected to drive roughly 15,000 miles a year. Put on more than that and you can take away hundreds or even thousands of dollars from your cars worth.
How Do You Get Back On Track?
Now, let’s look at how to get back on track. You have a lot of options. Some of them are hard and some are easy but may require making some sacrifices.
- Make extra payments to principal.
This is a simple way to get back on track, but it still might take you months or even years to get your vehicle loan balance back on track.
Take your loan balance and subtract your current vehicle value. Then divide that by a set time period to get your extra payment value. For example, if you owe 20,000 dollars and your car is worth 18,000 dollars, you would be upside down 2000 dollars. Want to get that back on track in a year? make a payment of $160 each month towards principal.
- Refinance your loan.
If your credit has improved, you may be able to qualify for a shorter term loan with a lower interest rate. This may allow you to get caught up faster with your vehicle.
Here is an example. A $20,000 loan with an interest rate of 12 percent would have a payment of $445 for 60 months. That same loan with a 6 percent interest rate would have a payment of $470 for just 48 months. This is a minor payment increase but the reduced interest would allow you to gain equity much faster.
- Use windfalls to catch up.
A windfall is an unexpected large sum of money. This could be from a bonus at work or perhaps an income tax refund. Windfalls are money that you did not plan on and thus were not depending on. Using them to pay down your loan balance would be a great way to get caught up on your auto loan without affecting your regular budget.
Even if you can not bare to “waste” all of your money on paying down your auto loan, try to use steer part of it that way. If you get refund for 1500 dollars, take 500 dollars and have some fun and put the other 1000 dollars on your car or truck loan.
- Trade in your vehicle.
One of the chief causes of getting behind on an auto loan is having a long term loan. Long term loans are generally used to make expensive vehicles more affordable. It gets the payment down, at the cost of excess interest and an overall much more expensive loan.
If you want to get back on track, consider trading in your vehicle on a more affordable one. That might allow you to take out a loan with a shorter loan term so that you can get ahead of the game.