How to Escape a High Interest Car Loan with Negative Equity

Stephen Snyder is the founder of the After Bankruptcy Foundation and author of the site Life After Bankruptcy. Check out Life After Bankruptcy for more articles, resources, and support to get your life back on track after bankruptcy.

What do you do when you’re upside down on a car loan?

Let’s assume that you have a high-interest car loan that you’re upside down on (you owe more money on the vehicle than it’s worth). How do you turn this situation into something better?

STEP #1 – Determine how upside down you are.

First call your lender and get an accurate payoff. The payoff is what you owe on the car. Here’s what you need to know to get the correct payoff:

If you purchased your car, the payoff is simply the total outstanding debt you must pay off in order to get a clear title.

If you leased the car, you need to ask for the remaining payments, PLUS the residual value (the amount you can buy the car for at the end of the lease, if you decide you want to purchase it), and any early termination fees.

If you know for sure you’re trading in the car, cancel all extra insurances (e.g., credit life, disability insurance, extended warranties) you might have bought when you signed your contract. To cancel them, you’ll need to call the dealership you bought the car from and sign cancellation forms for this refund to be applied to your loan. The refund can take anywhere from two to six weeks to reflect on your payoff with your lender.

If you buy your next car from the same dealership where you bought the car you’re trading in, they can give you an immediate refund and apply it as a down payment on your new loan.

STEP #2 – Find out what your car is worth.

Here are my top three resources to find the most accurate trade-in value for your car.

1. The most accurate website for appraisals is kbb.com (Kelly Blue Book). Click on, “Used car values by make and model.” Then enter in all of your vehicle’s information… remember to be accurate. Click “Good” for condition even if you think your car is in excellent condition. The amount given for “Good” condition will be what the dealer will offer you 95% of the time.
   
   
2. You should also go to Edmunds.com. Click on, “What’s your car worth?” Once you enter all your vehicle’s information it will show you the trade-in value.
   
   
3. If there’s a CarMax® dealership close to you, you can drive your car there and they’ll give you a free appraisal. And, even though their appraisals are free, I’ve found them to be very accurate.
   

STEP #3 – Use car manufacturer rebates to get the best deals.

To best explain the rebate strategy, I’ll use an example. Let’s assume you’re $5,000 upside down on your car—believe it or not you do have options.

Your best strategy is to find out which new car manufacturers offer a rebate equal to or greater than $5,000.

Car manufacturers offer rebates all the time to stimulate sales. You can use the rebate to remove the negative equity on your existing vehicle so you don’t end up carrying that debt into the next car you finance.

Again, KBB.com and Edmunds.com are good resources to research the auto manufacturers that offer the highest cash rebates in your market area.

If it were me, using the example above, I’d look for rebates higher than $5,000. That way I could get into a new car with potentially no cash out of my pocket…as long as the dealer knows how to structure the deal properly.

Another way to achieve a bigger discount is to ask the dealer if they have “aged” inventory. If a car has been sitting on their lot for 60 days or longer, that dealer is really motivated to discount that car just to stop paying the high floor plan fees. Every car that doesn’t sell within 60 days is just taking up space and is preventing the dealer from replacing it with another car that will sell quicker.

STEP #4 – Determine which car manufacturers will work with you.

Get on the telephone and call the local car dealerships. But don’t talk to just anyone in the car dealership…and you especially don’t want to talk to a car salesman.

You want to speak with the finance director. If you just ask for someone in the finance department you might end up with a part-time person with no real knowledge. You need someone who can tell you if you have a snowball’s chance in “the hot place” to finance a new car with the rebate you need.

If they begin asking you permission to review your credit reports/credit scores you know what to say, right?

“No, thank you. I just need to know your experience in getting a person with FICO® credit scores of X, Y, and Z financed?”

You don’t want to apply for credit. At least not yet.

All you need to know is if there’s a high likelihood you’ll get financed with your current credit scores.

You don’t need a promise written in blood that you’ll get financed. Just reassurance you’re not barking up the wrong tree.

STEP #5 – It’s all about your credit scores.

Be sure to pick a car manufacturer that uses your highest FICO credit score to make a lending decision.

By using the steps outlined in above, you not only have a way to get rid of the negative equity in your existing car, but you’ll be able to finance a NEW car at a low interest rate through a good mainstream lender with a lower monthly payment and with little or no money down.

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