How to Deal with an Underwater Car Loan When You Can't Sell

According to experts at the automotive website Edmunds, a new car loses up to $7,419 of its value during the first year on the road. Over the next three years, new cars lose an average of $5,976 in value, mostly due to age and wear and tear.

This shows just how quickly a fancy new car can depreciate in value—and how quickly it can become worth a lot less than what you owe. After all, if you financed that new car without a down payment, the average car owner would have to pay $7,419 in principal payments the first year just to keep up with rapid depreciation.

But what if you want to sell your car and your loan is underwater? Unfortunately, this is a real issue, and one that happens all the time. If you’ve financed a car and can’t afford the monthly payment, if you need a different vehicle to fit your family or job, or if you just want a do-over, it may be difficult to find a solution without taking a loss.

If you’re underwater on your car loan and can’t sell, here are some potential solutions and why they may or may not be a good fit for you.

1. Trade in Your Car

According to another study from Edmunds, 32% of all automotive trade-ins were underwater during the first quarter of 2016. Car owners who owed more than their cars were worth had an average of $4,832 in negative equity before they traded up to something shiny and new.

This just goes to show that if you owe more than your car is worth, you’re in good company. But that doesn’t mean trading up is good for your wallet. The dealership you work with may be able to wrap your debt into your new loan, but unfortunately, you’ll remain underwater, even with the new loan.

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If you’re trying to get out from under an oppressive car loan, this isn’t the solution. The only time to consider this option is when you need a different car to accommodate a changing life situation, such as with your job or your family.

2. Make Extra Payments

If you’re tired of being underwater and just want to sell your car, some experts advise making extra payments on your loan to pay it off faster.

However, if you’re struggling to come up with cash, you may want to consider halting your investment or retirement contributions to free up cash, notes Joseph Carbone of Focus Planning Group. According to Carbone, while it might sound over the top to stop investing for a while, this strategy might be the best choice, especially if the interest rate on your car loan is over 10%. Once you pay down your car loan and sell your vehicle, Carbone says, you can resume investing as usual.

Another option is to go on a limited-time spending freeze, says Texas financial planner Matt Adams.

“If cash flow is an issue, then it is time to tighten your budget and/or find a way to earn some additional income to pay the note down,” he says. This might be a good idea if you want to free up cash without changing your investment strategy.

3. Refinance Your Car Loan

While it might seem counterintuitive to take out another loan, refinancing your loan can make sense in certain situations, says Anthony Montenegro of Blackmont Advisors.

If you’re struggling to keep up with outrageous payments, for example, a new car loan could help you score a lower monthly payment, so long as you’re willing to extend your repayment timeline. It can also make sense to refinance if you have a high interest rate and you’ve improved your credit enough to qualify for a new loan with a significantly lower rate.

Before you refinance, make sure you look around for auto loans with no or low closing costs. Also, read the fine print on your new loan to make sure you understand your new payment and when the loan will be paid off.

4. Use Your Car to Make Money

Consider using your car to earn some extra cash. One way you can is with Turo.com—a website that lets you rent out your car. Alex Whitehouse of FinHealthy.com says that Turo.com is like “Airbnb for your ride” and notes that according to Turo, “hosts can typically cover their car payments by renting out their cars just nine days a month.”

If you have some spare time for a side hustle, you could also start driving for a rideshare company like Uber or Lyft. Financial planner Charles C. Scott says that you can “let your car work for you” this way. And since this side gig is flexible, those extra hours can fit nicely into your regular work schedule and social calendar.

5. Keep Your Underwater Car

Whatever the reason for wanting to ditch your underwater car loan, keep in mind that your alternatives may not be perfect. Sometimes it makes the most sense to just keep the car and pay it off the slow and painful way, says Ryan Cravitz of Milestone Wealth Management & Insurance Solutions.

If you’re able, paying your car off at a regular pace would eventually put you in an enviable situation—being free from car payments completely. The challenge at that point would be to avoid trading in your paid-off car and starting the whole process over.

The Bottom Line

The next time you find yourself itching for a new car, try to avoid a situation where you’re buying more than you can afford. According to Steven Rocha of Define Financial, “If possible, take your time and save money for a larger down payment,” and “doing so will make the purchase feel more real and might make you reassess just how much car you really want.”

Regardless of how you deal with an underwater car loan, keep in mind that you could easily make this mistake again if you’re not careful. Car dealers are more than happy to sell you one overpriced car after another, and you could spend most of your adult life owing money on cars that depreciate at lightning speed.

If you find yourself stuck in a pattern of underwater loans, or if you just want to get better at managing your debt, you can find more information online that may help. And before you buy another car or make any other big purchase, take a look at your credit report. You can see your credit report for free at Credit.com.

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