Jun 10, 2020 / Auto & RV

Owe More Than Your Car Is Worth? Here’s What to Do

Realizing you owe more on your car than it’s worth isn’t a fun surprise. If your auto loan balance is higher than your car’s current value, you’re what the financial world calls being “upside down” or “underwater” on your loan. No need to freak out, though — you’re not alone, and you’ve definitely got options!

At Utah First, we know life happens, and no matter what brought you here, our team can help you come up with a game plan to boost your finances and steer your auto loan in the right direction.

How’d You Get Upside Down?

Truthfully, a lot of it boils down to timing and math. Cars naturally depreciate (lose value) over time, and sometimes, they do it faster than you can pay down your loan balance. You’re more likely to end up upside down if:

• You took out a longer-term loan
• You had a higher interest rate
• You put less money down at purchase

This situation is more common than people think, and knowing what caused it can help you figure out the next best steps.

Your Options for Getting Back Above Water

If you want to close the gap between your loan balance and your car’s value, you’ve got several options:

• Throw a little extra at the principal. Even small extra payments made directly toward your loan principal can help chip away at negative equity faster.
• Keep calm and drive on. If you like your car and the payment feels manageable, staying the course can work, too! As you keep making payments, your loan balance will eventually catch up with your vehicle’s value.
• Refinance and see if you can catch a break. If your finances or credit have improved, refinancing might help you snag a better rate, lower your payment, or save money over time.

When’s the Best Time to Refinance a Car Loan?

If you’ve been able to boost your credit since you got your car loan, refinancing could be worth a closer look. Your credit score plays a major role in the interest rates you qualify for, and when you qualify for a better rate, the car loan refinance benefits can mean easier payments and long-term savings. We love a comeback!

For example, someone with excellent credit may qualify for a rate that’s several percentage points lower than someone still rebuilding their score. Over the life of the loan, this difference can add up to hundreds or thousands of dollars saved. (Love that for your wallet.)

Quick Tips to Boost Your Score Before Refinancing

Want to make sure you get the best rate possible when you refinance? Here are some simple ways to bump up your score in the meantime:

• Fact-check your credit report. Mistakes happen! You can check your credit report for free once a year at AnnualCreditReport.com and dispute things like incorrect account details or outdated info that could be hurting your score.
• Pay loans and bills on time. Payment history makes up a huge chunk of your credit score. Setting up Auto-Pay in Digital Banking can be a total lifesaver, helping you never miss a due date.
• Don’t max everything out. Try to keep your credit utilization below 30% and pay down balances regularly. Your score tends to like that!
• Hold off on new credit apps for a while. Every new credit application can temporarily ding your credit score. If refinancing is the goal, it might be worth holding off on new lines of credit for a few months.

Need a Game Plan? Let’s Talk It Out.

At Utah First, we’re all about helping people feel confident about what comes next — whether that means tackling negative equity, qualifying for an auto loan with your current credit, or refinancing into a better fit.

Chat with one of our friendly financial experts to learn more about our auto loan options and how we can support you on your path forward.