Check out our video for tips and ways to navigate upside-down car loans here or read the full video transcription below. 


10 Tips for Individuals in Upside Down Car Loans | Video Transcription

What’s up, everybody? Today, we’re talking about auto loans. More importantly, being upside down in an auto loan. We’re going to go over how you can avoid it and how you can plan to not be upside down ever again, and some steps you can take. We’re going to get started right now.

Welcome back to the channel. As usual, if this is your first time here, please don’t forget to subscribe to the channel and ring the bell that way you don’t miss a video when we go live or when we drop a new one. 

Okay, today we’re talking about being upside down in an auto loan and I want to just take a second to describe what that is. If you’ve ever purchased a vehicle and paid taxes on and financed it for five or six years or even longer, then your vehicle value is less than what you actually owe on the car. 

Owing More Than The Vehicle is Worth

And let me repeat that. So you take out a long-term loan, you owe $50,000 in the vehicle and then you go have the vehicle appraised, and it’s worth $45,000. So you are now upside down in that car loan. I hope that makes sense because that’s what this video is about today. How you can avoid it and steps you can make to not have yourself be in that position again.

And if there’s anything you really can take away from this video today is basically I’m going to talk about some steps you can take, but most importantly don’t react. 

So we want to find ways that we can plan instead of react to situations. 

Planning > Reacting

So reacting to situations usually means we trade in the car and keep on rolling in the negative equity instead of planning to like bite the bullet and make payments for two more years until you finish that loan, and then have a fresh start is what I’d like to see you get out of this video instead of reacting.

And so if you’re taking notes today, the first thing I want to share with you, and this is a tough one for people, but how you can avoid it, how you can avoid being upside down. 

If you’re buying a car, let’s say you don’t want to lease a vehicle, you want to finance a car and pay it off. And why would you do that? Because you want to end up having no payments after you pay it off and then you can do something else with that money, which is always a great plan if you can afford to do that.

Down Payment of 20 – 25%

The number one way you can avoid being upside down in the vehicle is to put 20 to 25% down when you make that purchase. Think about it. On a 30 grand car in Colorado Springs, if you buy a vehicle for 30 grand, the taxes are 8.2% over and above that. So even if you put 3000 down which is 10%, you’ll still owe 30 grand when that loan starts. 

So putting down around $8,000 which is around 25% will basically get you to a point where you’ll only owe about $25,000. So when you leave for that first payment and that first payment’s due in 30 days, your balance is 25. The car’s probably worth around 25 because they lose a lot of value when you drive off the lot.

And so that can help you. Now, it’s a tough one for people to swallow coming up with 20% down, but that is definitely a way you can avoid being upside down when you start out your next loan.

Keep Your Car 5 Years

The other thing you can do to avoid being upside down on a loan is to stop trading in every three years. If you’re going to be trading every three years, guys, go look at one of my leasing videos because you are definitely a leasing candidate. 

However, if you are trading in all the time because you’re upside down and you’re having problems with the car you can’t keep the car long enough to pay it off, you’re going to run into this upside down issue and it’s just going to follow you for years and years and years.

So the number two way is to avoid trading in. 

Make a better plan in the beginning, which is what we’ll talk about next and that will help you avoid the pitfalls of having to trade in a car and continuously be upside-down. 

Write Down Your Vehicle Plan

All right, let’s go into the planning phase of how you can avoid it if you’re not upside down currently in a vehicle loan. If you are, I’ve got a couple of other things we can talk about later on in the video. But right now, let’s just talk about what you should be thinking about before you plan to do a long-term financial loan on a vehicle.

When I sit with people and ask them about vehicles and we’re talking about setting up financing through a credit union or a bank, I usually ask and what they’re going to use the car for. 

So you want to get out a piece of paper with your family before you go out and purchase something and do a long-term loan on it because you want to really think about what you’re going to be using the vehicle for. And then you want to think about what’s going to change in the next three to five years. Case in point, kids, right?

So like if you buy a two-door car and do a five-year loan and then have a baby in two years and still owe three years on that vehicle, odds are you’re going to have to trade it in because you’re going to outgrow the car. Nobody’s going to want to get in and out of the backseat of that vehicle and put a child seat in it. And so these are thoughts that you should have before you sign up for any type of car loan.

Plan for Changes in the Future

The other is for people who already have kids like you have two and the magic number’s three, guys. So once you have kid number three, it changes everything with the car business. Like you have to have a third-row seat at that point in time, then you start having discussions about captain’s chairs. Then you start having discussions about are you going to be towing anything like a camper or stuff like that because you got to do stuff with your kids. 

Before you buy that car, sit down and try to forecast what you’re going to be using it for for the next five years. And just write those things down. And I know they’re not going to stay in stone, but at least give yourself a chance to not have to make a change before you pay the car off.

The other thing you want to look at when you’re planning your vehicle is your driving habits. How many miles a year are you driving? How much does it cost to service that vehicle every year? These vehicles are a lot more technologically advanced, but they do require service to maintain them. 

And if you are starting out and you’re driving like 15,000 miles a year, that’s usually very manageable. That’s a few oil changes a year, but if you’re going to be taking another job in two years or if you’re on a contract job right now and you don’t know what’s going to happen, it’s just something you should be considering. How many miles am I going to be driving this vehicle? So that’s something you should be planning as well.

Plan and Budget for Maintenance

And knowing how many miles you’re driving, guys, it helps you a lot like with all the fuel you’re going to have to put in that vehicle, how much it’s going to cost you long-term. Remember what I said earlier. Most people just react to these things. They’re used to reacting. 

So basically they start driving a lot and then, “Great, we need to trade it in the car because I’m sick of putting a $100 in it a week of fuel.” And so they react, then they trade in, get better fuel economy, but now they’re $7,000 upside down in the new car. And so it is too many times we are just reacting to these things instead of taking a little bit of time before we purchase the vehicle and sign the loan to plan it out. It just helps ease some of those bumps.

All right, if you’ve got anything that could help all of us plan our vehicle purchases better and look at our lives and what we’re going to be using these cars for, go ahead and put it in the comments because we’d like to open this up for discussion.

Another thing I would use when I’m planning this out with my purchase is look at the habits you had on your last car and you’d be surprised. Most of my clients when I ask them how many miles they drive a year, they don’t know. 

And so what we have to do is I’ll go, “All right. Do you have any paperwork from when you purchased your car?” “Yeah, yeah. I think I can find that.” “Okay, great. Let’s pull that out. It says here you had 10,000 miles on the car when you purchased it, it’s been four years and now you have 55,000 miles on it.” So anybody can do that math and figure out how many miles they’re driving per year. So you can do this yourself if you just go dig those documents out and start looking at how many miles you’re driving a year.

Refinance Your Loan

All right, so that’s it for making a plan. Now let’s talk about if you’re currently upside down, there’s two last things I want to discuss today what you can actually do. The first thing I would do if I was upside down in the vehicle right now is I would look at refinancing the vehicle. 

Guys, refinancing a vehicle is not like a house. There aren’t thousands of dollars in fees. Most credit unions do this for free, but there’s some things you’re going to need, right? They’re going to need to know the value of your vehicle so you’re going to need the VIN number and you can call USAA on the phone. You can use your local credit union. You can go talk to them.

If you bought that vehicle two, three years ago and you are currently upside down with negative equity, there’s a way you can lower your payment right now without doing anything but refinancing the vehicle. So you could call the credit union, find out what your value is, how much they’ll loan you, what the interest rate is. And you can compare that to what you have now and refinance that loan today.

The other thing, try not to stretch the term out, right? So if you owe three years, don’t go get a five-year loan when you refinance it. Just refinance it for three and that way you can still pay it off early, but you might lower how much interest you owe if you can lower the rate. So that’s the very first thing I would do if I was in the position of being upside down on a car is I would basically go see if I could refinance it and see if I could get some better terms and better interest to get that vehicle paid off a little bit sooner.

Finish Your Current Loan

The second thing you can do, if you are currently upside down is it’s going to sound simple, but you got to finish your loan. You got to finish this loan off or at least get to the last year where the vehicle is worth about what you owe on it. 

Because negative equity seems to just continue to follow you. It doesn’t ever just evaporate unless you roll it into a lease and then it disappears in three years. But when you’re doing long-term loans and trying to pay them off, you got to find a way to finish that loan. So what does that mean? That means sitting back down and planning out your driving habits and what you’re going to need in three years.

Let’s say you have three years left and you’re five, 6,000 upside down. It’s not the time to panic. It’s like we should probably just plan what we can use this car for three years. Three years is going to go by relatively quickly. So you can take a look at that, you can forecast that. You can maybe pay a little bit extra on the loan, maybe another $100 a month to help pay it off a little bit sooner because car loans are simple interest. If you pay them off faster, you don’t pay the interest on them.

So finishing the loan and then giving yourself some breathing room to make your next plan would be really high on my list if you’re actively upside down on a vehicle a loan. Now I could go on and on and on forever about being upside down on a loan or trying to avoid it, but it’s basically simple stuff. 

Put Cash Down and Make a Plan

Try to put 20 to 25% down, avoid trading in every three years and how you’re going to avoid trading every three years is you’re going to make a plan. You’re going to plan your job in habits. You’re going to look and see if you’re going to be having kids. You’re going to discuss what you’re going to be using the vehicle for. If you need to get a camper, if you need to pull things, you are going to jot all this stuff down and make a plan.

And then the last thing is if you’re currently upside down, just try to refinance the vehicle if you can. Do not stretch out that term if you can avoid it and try to finish that loan and then plan for the next vehicle purchase, lease, whatever it’s going to be. So I hope this stuff helps you guys today. And if you have more information you’d like to share with us, please put it in the comments. You can check out some of the other videos on car buying and I’m always available for questions. I’m Ronnie Haskins. I hope you guys have a great day.