What Does It Mean to Be Underwater On a Car Loan? When terminology like “underwater vehicle loan” is bandied about in the car loan market, everyone expects that you are familiar with what they are talking about. You might not be surprised to learn that a waterlogged car has nothing to do with an underwater auto loan. When you have an underwater auto loan, your debt exceeds the value of the vehicle. Nowadays, getting yourself into this awful circumstance is not at all difficult. Unfortunately, figuring out whether or not your loan is underwater is simpler than really addressing the problem, but it’s still a crucial first step:
Check Your Car’s Value: It’s not as tough as you would think to determine your car’s worth. Visit a website that provides the service first, like Kelley Blue Book, Edmunds, or Auto Trader. Although the costs are simply guides, all are trustworthy websites that are quite capable of giving you the information you require. A dealer might not give you the same price quote. Simply enter your location, year, make, model, mileage, wear, and any special features to see both the projected trade-in value and the amount you should be prepared to pay if you decide to purchase the vehicle from a dealer. You may give it a shot at multiple sites and get a range of offers.
Look Up How Much You Owe: I understand that knowing your auto loan balance is vital to you but is not something you want to do. Most likely, your vehicle lender already sends you a statement each month along with your bill. In that case, hopefully, you can check your account’s balance online. Call your lender and find out how much of your debt is still outstanding if everything else fails.
Compare the value of the vehicle to the loan amount: It’s time to compare things now. Does your auto loan exceed the value of the vehicle that you are financing? How much do you owe, if at all? If the difference is only a few hundred bucks, 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.
Risks of Being in Debt With A Car Loan: What’s the big deal, then? Does it matter if you have an underwater vehicle loan? The truth is that it very well might matter. If your automobile is totaled in an accident or you need to sell it, you will be responsible for the difference between the car’s value and your outstanding debt. You can find a difference of several thousand dollars if you compare. If you are involved in a serious car accident or your vehicle sustains significant damage, could you manage to pay the difference tomorrow?
How to Avoid Being Underwater on a Car Loan:
- Paying at least the suggested 20% down payment on an auto loan is the best method to prevent falling underwater 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 sizable down payment. The moment you drive your car off of the lot, it loses a substantial amount of its value, and you must consider this before purchasing more cars than you can afford.
- Select an auto loan with a period of no more than 48 months. It will take you longer to get ahead of the game and you will pay more in interest throughout the loan if your auto loan is longer.
- Buy gap insurance, but proceed with care. Gap insurance pays the difference between your outstanding debt and the value of your automobile, but many people fail to mention that it does not cover warranties, rolled-over auto loans, taxes, or title costs in some areas. Gap insurance is therefore only useful to cover depreciation. Pay your warranty charges up front, along with your taxes and other fees. If you choose, you can never add them to your auto loan to stay afloat.
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