Are You Underwater on Your Car Loan? Here Are 3 Moves You Can Make


One of the biggest costs of owning a car happens behind the scenes: car depreciation. From the moment you buy your car, you start losing money. Cars are not like houses or stocks — they do not go up in value over time. Instead, cars usually lose value. It’s an unfortunate reality of owning cars, but you need to be prepared for it — and your auto insurance policy should be prepared too.

Many car owners find themselves in a predicament called being “upside down” or “underwater” on your auto loan. This happens when you have negative equity in the vehicle — when you owe more on the loan than the car is worth.

Let’s look at what it means to be underwater on an auto loan, and how you can fix this situation.

Are you underwater on your auto loan? Here’s how to find out

Used car prices declined in 2023, after a few years of sky-high prices during the pandemic. That’s good news for used car buyers, but it’s bad news for current used car owners. If you bought a used car during 2021 or 2022, during the days of global car shortages, that was an especially bad time to be a car buyer. Unless you made a huge down payment, your used car might be worth less than you owe on the auto loan.

Here’s how to find out if your car loan is “underwater”:

  1. Find your latest auto loan statement and see what your outstanding loan balance is.
  2. Go to Kelley Blue Book (kbb.com) and click “My Car’s Value” to get an estimate of what your car is worth, based on its mileage and condition.

For example: If you owe $15,000 on your auto loan, and your car is worth $20,000? Congratulations: you are NOT “underwater.” If you had to sell that car today, you could pay off the loan and still have $5,000 left.

Read more: check out our picks for the best car insurance companies

But if you owe $15,000 on your auto loan, and your car is only worth $12,000, that’s a problem. You are “underwater” by $3,000. If you had to sell your car today — or your car got totaled in a car crash — you would not have enough value left in the car to pay off the loan. You’d have to come up with another $3,000 to pay off your lender.

How to fix your underwater auto loan

Let’s look at a few smart money moves you can make to avoid getting swamped by unexpected expenses from being underwater on a car loan.

1. Buy gap insurance

Update your auto insurance policy to get gap coverage, which will pay extra money in case your car is totaled. This way you can pay off the loan without having to come up with extra cash. Gap insurance is a special type of extra auto insurance that covers the “gap” between the value of your car and the amount you owe on an auto loan.

Let’s say that your car is worth $12,000 and you owe $15,000 on your auto loan. If your car gets totaled in a car crash, gap insurance will pay more than the car’s value. Instead of just getting paid $12,000 (and having to deal with your auto lender to cover the rest), gap insurance means that your car insurance company will pay the full $15,000 amount of your auto loan (minus your deductible).

Gap insurance is a great way to get to the financial safety of “dry ground” after being underwater on an auto loan. Most of the best car insurance companies offer gap insurance coverage, and it’s not expensive — it might only cost about $3 per month ($36 per year). Talk to your car insurance company and see if you can add gap insurance to your policy.

Being underwater on an auto loan is another good reason to boost your emergency fund. Even if you get gap insurance coverage, it’s still a smart idea to increase your savings. If your car gets totaled tomorrow, and you don’t have enough cash to pay off the auto loan, what will happen to your personal finances? What if you get stuck with a wrecked car, an unpaid auto loan balance, and no car to drive to work?

Having enough money in the bank to pay off your extra auto loan balance — and having a small down payment ready for your next vehicle purchase — is an important part of financial security. Even if you’re making your monthly auto loan payments and you have good credit, cash in the bank gives you flexibility in case you have to go car shopping on short notice.

Another way to get your head above water on your auto loan is to make extra loan payments to pay down the principal balance faster. Especially if your car loan has a higher interest rate (even some of the best auto loans are charging over 6% APR as of Feb. 22, 2024), it could be worth paying off your auto loan faster to avoid interest charges.

Bottom line

If you are underwater on your auto loan, don’t panic. Keep making car payments. Over time, as your loan balance goes down, you might catch up on the depreciation. But keep an eye on the amount of your auto loan balance, and be prepared for this possible extra emergency expense. Buying gap insurance can give you priceless peace of mind, and it may only cost about $3 a month.

Our best car insurance companies for 2024

Ready to shop for car insurance? Whether you’re focused on price, claims handling, or customer service, we’ve researched insurers nationwide to provide our best-in-class picks for car insurance coverage. Read our free expert review today to get started.



Source link

About The Author

Scroll to Top