What to do if you’re underwater on your car loan

More car buyers are finding themselves in a tough spot financially According to a modern analysis from Edmunds more than of new-vehicle trade-ins in the second quarter of had negative equity the highest share in more than four years Negative equity refers to a situation in which you owe more on your car than it s worth leaving you upside down or underwater on your loan Negative equity is an acute concern when you transaction that carriage for another new one because you ll have to pay off what you owe while simultaneously taking on the new loan payments The average amount owed on these upside-down loans was underscoring the mounting risks of car debt in in the current era s arena Consumers being underwater on their car loans isn t a new trend but the stakes are higher than ever in at present s financial landscape commented Ivan Drury Edmunds director of insights Affordability pressures from elevated motorcycle prices to higher interest rates are compounding the negative effects of decisions like trading in too early or rolling debt into a new loan In other words ending up upside down on your loan is becoming easier than ever But you can take strategies to avoid the worst of negative equity Keep your current van longer If you re already upside down the simplest way to avoid digging a deeper financial hole is to hold on to your current carriage and keep making payments Time and patience are often your best allies Every payment you make lowers the balance while depreciation on your conveyance decreases after the first scarce years Eventually the loan balance will fall below the motorcycle s value This strategy requires discipline and the ability to resist the temptation to transaction into something newer But it will help you avoid spending money you don t have to According to Edmunds records buyers who had negative equity on their current truck and rolled it into a new carriage loan paid an average per month compared to an industry average of They also financed more than the typical new-vehicle buyer Hanging onto your current car until the balance catches up may not be exciting but it s often the surest way to avoid multiplying your debt Refinance or roll the debt into a new car lease Refinancing can sometimes soften the blow of negative equity If your credit has improved or interest rates are lower than when you first financed a new loan might reduce your monthly payment and buy you time to catch up Another option is to lease your next car rather than finance its purchase You will still have to pay higher-than-typical monthly payments because you ll be paying off your current bus s negative equity along with your new carriage s lease payments At the end of the lease you are no longer upside down and you ll be walking away from your van when the lease ends But therein lies the rub You won t have a wagon to use as a trade-in toward your next purchase You can either lease again or finance your next new or used car purchase Avoid negative equity in the first place The best approach is prevention Edmunds experts note that buying a brand-new car often puts you in a depreciation hole the second you drive off the lot A new car typically loses about of its value within the first year meaning even a modest loan can leave you owing more than the car is worth if you don t make a big down payment The cure Buy used Buying a used carriage helps you avoid the worst of depreciation A - or -year-old bicycle will still have plenty of life in it and it should still have warranty coverage If peace of mind is central consider buying a certified pre-owned carriage These vehicles must pass a dealership inspection and typically come backed by an extended warranty This strategy helps minimize the threat of being underwater a year or two down the road Another key step is to make a larger down payment Edmunds recommends aiming for at least down That cushion will help your loan balance shrink quicker than the car s value giving you positive equity sooner Absolutely avoid ultra-long loan terms It s tempting to stretch financing to or even months to lower the monthly payment But doing so keeps you upside down longer A -month loan or shorter while more expensive monthly is much safer financially Edmunds says Being underwater on a car loan isn t catastrophic but it does require discipline to escape The first step is prevention Buy smart make a solid down payment and avoid an overly long loan If you re already upside down your best option is usually to keep the car until you regain equity This story was provided to The Associated Press by the automotive website Edmunds Josh Jacquot is a contributor at Edmunds Source