An upside down car loan means you owe more to the lender than the asset is now worth. This can occur quite easily with a car loan because the value of a car decreases sharply once you begin driving it. You should be wary of the upside down loan for a few reasons.

Recourse Loans in Default

If you default on your loan, the lender will seize your car in order to pay off the amount remaining in value on the loan. However, if the lender determines your car is not worth enough to pay off the loan, you may be responsible for paying the difference. This is called a recourse loan. A recourse loan should be avoided, particularly with used car loans. When you are upside down on a recourse car loan, take careful steps to avoid default or you may be responsible for a large sum.

Trade-In Value of Vehicle

Buying a new car when you still have a loan on the trade-in vehicle is possible. However, if the person accepting your trade-in offers a lower amount than is left on your current loan, you will have to pay the difference. Instead of using your trade-in for a down payment, you will end up paying the old lender and the new lender all at once.

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