What Does It Mean to Be Underwater On a Car Loan?
The car loan world can be a confusing place, and when terms like “underwater car loan” are tossed around, everyone assumes that you know what they are talking about. It might not come as a surprise to you, but an underwater car loan has nothing to do with a flooded car. Being underwater on your car loan means that you owe more on the loan than what the car is worth. In this day and age, it is not hard at all to get yourself into this unfortunate situation. Determining whether or not your loan is underwater is, unfortunately, easier than fixing the situation, but it’s an important first step:
Look Up the Value of Your Car: Finding the value of your car is not as difficult as you might think. Start by going to a website that offers the service, such as Kelley Blue Book, Edmunds, or Auto Trader. All are reputable sites that are very capable of providing the information you seek. You will just need to input your year, make, model, mileage, wear, and any special features, as well as your location, and you’ll be able to see both the expected trade-in value and the price you should be willing to pay if you buy the vehicle from a dealer.
Look Up How Much You Owe: I know it is not something you want to see, but knowing how much you owe on your car loan is incredibly important. You are probably already receiving a statement every month included with your bill from your auto lender. If not, then hopefully you can access your account online to determine your balance. If all else fails, call your lender and ask how much is left on your loan.
Compare Car's Value To The Car Loan Amount: Now it is time to do a comparison. Do you owe more on your auto loan than what the vehicle is worth? If so, how much do you owe? If you are within a couple of hundred dollars of difference, I'd say you are probably okay and can quickly make up the difference. Anything more than that, however, and you are underwater on your car loan.
Pitfalls Of Being Underwater On A Car Loan: So what is the big deal? Does it matter if you are underwater on your auto loan? The answer is it most definitely could matter. If you are in a total loss accident or you are in need of selling your vehicle, you will have to pay the difference between what the car is worth and what you owe. As you make your comparison, you could be seeing a difference of thousands of dollars. Can you afford to pay the difference tomorrow if you are in a major car accident or your car is severely damaged?
How to Avoid Being Underwater on a Car Loan:
·The best way to avoid being underwater on your auto loan is to pay at least the recommended 20% down at the time of purchase. Depreciation, along with taxes, title fees, and warranties all make it hard to get ahead on your auto loan without a sizeable down payment. The moment you drive your car off of the lot, it loses a substantial amount of its value, and it’s essential that you consider this before purchasing more car than you can afford.
·Choose an auto loan term which is 48 months or less. The longer your auto loan, the longer it will take you to get ahead of the game, and the more you will pay in interest payments over the lifetime of the loan.
·Buy gap insurance -- with caution. Gap insurance covers the difference between what you owe and what your car is worth -- but what a lot of people don't tell you is that gap insurance will not cover warranties, rolled over car loans, and in some states, taxes and title fees. Therefore, gap insurance is only beneficial to cover depreciation. Pay your warranty costs, along with your taxes and fees, at the time of purchase -- never roll them into your auto loan if you want to stay afloat.