What to Do if You Have an Upside Down Car Loan

Dealing with upside-down car loans is a difficulty that many consumers face at some point. Your car loan is upside-down if you owe more money on the loan than the car is worth. Here are your options if you have an upside-down car loan. 


If you are upside-down on your car loan, this can present you with a few serious problems. For one thing, it can tie you down to your existing car and loan. If you decide that you cannot afford your monthly payments and you want to sell your car, in this situation it would not help you. For example, let's say that you buy a new car for $16,000. After a short time, you find out that your car is actually worth only $10,000. Therefore, if you were to sell your car, you would still owe the lender another $6000 on top of what you sold the car for. This means that you still have the monthly payment until the balance is gone. 

This also makes it difficult to change vehicles. Technically, you could trade in your car, but this will not solve the problem. In fact, it will likely result in your being even more upside-down on the loan than you already are. 

Gap Coverage

The first thing you need to do if you find yourself in this position is purchase gap coverage. Gap coverage is a form of insurance that is designed to help you pay the difference between what is owed and the value of your car if you get in an accident. In the above example, if you were in a wreck and the car were totaled, the insurance company would only give you $10,000 for your card. Then you would have no car but you would still owe $6000 to the lender. This is true whether the wreck were your fault or not. 

With gap coverage, the gap insurance provider would pay you the $6000 to help you eliminate the debt that you have. When you buy a new car through a dealership loan, they will offer you gap coverage as part of the purchase. However, even if you decided not to get the coverage at that time, you could purchase it from another insurance company at a later date. 

Wait It Out

While it might not seem like the most enticing option at this point, waiting for the situation to change is usually one of the only options that you have. As long as you are protected with gap coverage, you should just drive the car until either you pay off the loan or what you owe on it comes closer to the value of the car. At that point, you could sell the car and not lose money on the deal. If you choose not to sell the car at that point, you will have a car to drive free and clear of any auto loan payment. 

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