What Does It Mean to Be Underwater On a Car Loan?

Underwater on a Car Loan
••• Getty Images/Paul Bradbury

The car loan world can be a confusing place when terms like underwater car loan are tossed around and everyone assumes you know what they are talking about. It might come as a surprise to you, an underwater car loan has nothing to do with a flooded car. Being underwater on your car loan means you owe more than what the car is actually worth. In this day and age, it is not hard at all to get yourself in what is considered to be bad situation.

Lookup 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. Kelley Blue Book, Edmunds, and Auto Trader are all reputable sites that a very much capable of getting the job done. You will need to input your year, make, model, mileage, wear, and any special features. 

Lookup 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 important. You are probably 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 Verse the Car's Loan: 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? If you are within a couple hundred dollars I'd say you are probably okay. Anything more than that, you are definitely underwater on your car loan.

Pitfalls of Being Underwater on a Car Loan: So what is the big deal? Does it really 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 do 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?

How to Avoid Being Underwater on a Car Loan: 

  • The best way to avoid being underwater on your auto loan is to pay 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 big down payment.
  • 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.
  • Buy gap insurance. 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 will not cover warranties, rolled over car loans, and in some states taxes and title fees. Therefore, gap insurance is really 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.

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