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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113 Responses

  1. Kayla says:

    I have a 2008 Mazda 6. I have a 10.25% interest rate, and pay $219 dollars a month. However, I don’t get paid enough to be able to have a payment this big. I am trying to trade it in, but the dealers say I am about $2500 upside down. Any thoughts? Need help!

  2. me says:

    OMG! Are you seriously complaining about a $219 monthly payment! I would do anything to lower mine to at least $300!!!!!!!!!!!!

  3. Mel says:

    Heck I pay $18000 I will take the $219 anyday!!

  4. Mel says:

    Sorry meant $418.00

  5. M says:

    WOW…I pay $315.00 @29.9% then they tack on a late fee and it jumped clear to $358!

  6. Georgia Moll says:

    Im sick that I bought a 2012 Kia worth 16,000 for 23,000 and im financing the whole 23,000 at 17% interest. Is there any hope for me my credit score is 590.

    • Mike Hawk says:

      Not really bud, you’re what is known as a “sucker”. You came into a dealership not only with bad credit, but looking for a brand new car. You probably made the salesmen’s day. While you cant do much about your credit, you definitely didnt need to be buying brand new vehicles. Decisions like that are probably why you have bad credit in the first place.

  7. Channy says:

    I am the sole Caregiver for 2 parents. I had to declare bankruptcy because I had to give up my job with medical coverage. Anyway, I almost lost my car because of the Bankruptcy. It is the only car my mom can get into. I have negative equity, and can’t get a newer model of the same vehicle. My car had 25,000 miles put on it in less then a year because of being POA for both parents and all the medical problems they have. I just wish I could get a newer version, because this one is going to have problems that I won’t have the money to fix. I pick up some of my parents bills. So I am pretty much in trouble, and feeling hopeless.

  8. ced says:

    2011 Mustang, appraised at 11.5
    20% interest rate
    car purchased at 17Ky
    pay off 29K
    not so good credit (student loans)
    payments are $630/mo

    chance in hell? any options? bankruptcy perhaps?

  9. Ashleigh says:

    My husband and I currently share one car. We owe 4780.00 with a 7.99% interest rate on a 2005 chevy trailblazer. We have always maintained the car and 3 years ago we had to replace the transmission luckily it was still under Carmax warranty and we didn’t have to pay anything. We are now dealing with major engine and gas tank issues that would total 8000.00 to fix( new engine with warranty and fixing issue with gas tank). The mechanic is a good friend and said car wasn’t worth it to put this much money into. We need a car so husband can go to work. Also husband is 6’6 and we have 3 children 4 1/2 and under who currently are all in 90% for height and all in car seats. We were just going to pay of car and get out of current debt and then purchase a bigger car. We barley fit in this one due to height issues. Now we are thinking of trading in at Carmax. Does that seem like the better option or are we missing something. We will have no rent/mortgage as we are moving in with inlaws to get out of debt. We can also put up to 6000 as downpayment if necessary. We also both have excellent credit despite our debt. And thinking any car 30,000 or less seems to make the most sense on monthly payments depending on interest rate we can get. Any help would be appreciated. Just want to make the right decision to not mess up current credit and can be debt we can also try to make double payments when we can to reduce loan during this process.

  10. Tiana Coney says:

    I am purchasing a Chrysler Town and Country Touring- L with 40,000 miles and warranty covers motor and everything for the next 3 years and its a 60 month loan and the dealer says its 18000. My credit is good but no a lot on it. He said Interest is 6%. My payment would be 253.00 a month because I am putting 6000.00 down. Do you think that is a good deal? Also if a care is selling for 18000.00 with financing would a dealer accept a full cash payment of 14000.00? If he would is that a good thing to do or financing is better?

  11. jj Fisher says:

    I owe on a 07 Ford f150 I need cash bad !! I wanna trade it in for another vehical and get cash back and continue payments on new vehicle of lesser value so I can get the cash !!

  12. Southaven MS says:

    I was to I owe 14000 on my car with 4000 residual and my car is only worth 9000. I only have 58000 miles on my car. How can I trade it in.

  13. pam says:

    I still owe 7000 on my current car , but I need a new car for relialbilty. I cant afford the repairs Im single mom what do I do.

  14. Chelsea says:

    I owe $5400 on my car, my credit score is in the 400’s and i need ANOTHER new engine in it which, with labor will cost me an average of $2000 what do i do 🙁

    HELP!

  15. Nes says:

    I bought a 2005 malibu back in 2013 from a buy here pay here. The total price came out to 18,000 that included sales tax, tags, and license plate. I now owe $7,000 and my car payments are killing me. $118 a week. The Kbb values my car at $2,044 for a trade in. $3,298 for private party value and a suggested retail price of $6,243. Ive tried trading it in but because i owe so much nobody wants to deal with my car. I want to refiance my car but i dont want to have a bunch of people peeking at my credit if their not going to help. Ive worked hard for my 600 credit score though its not the highest I dont want to end up in the 500s again. Please help this car payment is killing me. What are my options? if any?

  16. christian says:

    Hi my name is christian. Im currently at a 5 year lease 228.00 per month. This month i make a year, anyways. Im upside down by 4000. I owe 9000 car is only worth 5000 if that. I feel stuck and im starting to have car problems. What are my options sir?

  17. Carol says:

    I just voluntary repossessed my 2006 Honda CRV the interest rates was 24.99% when I got it appraised it was only worth $4,120. I still owe $15,000 on it. How do I go about taking care of this debt without going to court or my wages getting garnished. The transmission was slipping and C02 sensor needed and a host of other problems and it 98,072 miles on it. I only had it for 2 years and 1 month exactly. What is my best options get a lawyer for consultation or give me some advice. I appreciate advice is really needed at this time.

  18. Harry says:

    Found out that I’m somehow 50% upside down on my car. I’m paying $551 a month which is way higher than I ever paid for a car. I’ve owned more expensive cars and paid $150 less a month(all financial situations being the same). The bank will not re-finance any current customers… I’m sure it’s because they know they approve bad high interest loans. I’ve tried re-financing with other banks and they won’t understandably touch it. Improving my average credit to better credit is a current goal. What should I do? I’ve been recommended to: (1) call my current lender and tell them to come get the car. (2) Also file the Big B (not interested). (3) Pay extra, which I have however the extra keeps getting credited to interest instead of principle. (4) Go get another car and tell the current lender to take this one back. (5) Try to trade it in on a more expensive car that holds value better (payments would be about the same but I’d have a better car for the money). and (6) Try to lease a vehicle and roll the negative into the payments leaving me paid off by the end of the 3 year lease. Sooooo….?

  19. monica says:

    I’m currently in the process of purchasing a new vehicle. I saw a 2008 GMC Yukon 70,000 for $21,000. I currently owe a 2004 Chevy Tahoe which I owe $0, it has 190,000 miles already so that’s why I want I newer car. The dealership where the 2008 GMC Yukon is at told me they will give me $4000 for my truck as a trade in. My credit score is in the low 500. They want to finance me with a 20% and payments of $588.00 a month for 72 months. I think that is a lot and the payment seems high. what do you guys think? please help.

  20. joel says:

    I am upside down on my vehicle by 12,000 and I’m thinking into trading it in into a lease so that i dont have a vehicle with negative for 5 years would that be a smart move?

  21. Khouri Griffin says:

    I have a 2009 PT Cruiser they are charging me 23004 for this car is only worth with the Kelley Blue Book value $5,000 it was over a hundred and two thousand miles on this car what can I do the payments are running me $450 a month what can I do and this car was also wrecked before is there anything that I can do I most certainly need a car what can I do to help

  22. Karen Jimenez says:

    I want to change my car by another car but I ‘m paying and still owe $ 21.000

  23. theresa says:

    hello,
    I have a 2013 Toyota Camry auto loan, cost me of 20,000 but I trade in to my Yukon that everything went to the Toyota so it end up my loan was $16323.00
    now with 23% interest should I look into trading my car to another one.

    pay-off $17000.00
    owed–16323.00
    appraisal -12000.00
    negative – 5000.00

    should I keep continue paying $459.00 and add $200.00 on my principal so I am paying $759.00

    or refi work on credit
    where Equifax 549
    Experian 581
    Transunion 579

    or get a another car worth 12000.00 and add the negative on it if the dealer allowed or financing company.

    help

  24. Ray says:

    i have a 2013 nissan altima that i bought two years ago. The judge awarded it to my ex wife and she just ran it into the ground. It was filthy, grimy, not well taken care of. She even had it repossessed (it was still in my name of course *sigh) so i had to pay money to get it back and Ive had it for 7 months now just to find out the transmission is screwed up. No one will even look at it and the ones who will charge way too much. I want to trade it in but i still owe 13,000 help

  25. Ryan Davis says:

    I bought a 2016 f 150 brand new lowest grade model I owe 35600 on it. It is only worth 18000. I can afford the 529 payment but I would really like a lower payment could I trade it in for something that cost a lot less and just pay the negative expenses on the other car I buy

  26. carolyn says:

    I have a lease to own vehicle through DriveTime. Over the last 2.5 years my credit has gone from 408 to 516. Mind you not a lot of improvement but I am slowly getting things done. I have about 6 months left and I would like to refinance to go ahead and pay the vehicle off and get a lower rate to pay monthly. (right now I am paying 218.00 every 2 weeks. ) Do you have any suggestions on who would be willing to work with someone with poor credit?

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