Quite simply, being upside down in a loan means that you owe more on your car than it is worth. This condition is also referred to as negative equity. This situation is particularly troublesome if your current car is in less-than-ideal shape because now not only are you paying to eliminate the value deficit, you are also paying extra money in repairs. In this situation, what is your best course of action?
Breaking the Cycle
If the car you are upside down in has serious problems, it will need to be replaced. In this situation you have three options, buying new, buying used or leasing. Here are some pros and cons of each of these options period
Whether you are upside down in a loan or not, often buying used makes the most sense. Cars are not an investment, and a new car loses value the moment it is driven off the lot. The advantage with used cars is that the depreciation has already happened, and the sales price will be closer to what the car is actually worth. But here is the problem. If you are upside down when you trade in your car, you'll be rolling the amount you owe on your trade-in into the loan for your new car. Most lenders are not comfortable with lending an amount of money well beyond the value of the car and you may not be able to get out of your current situation.
When buying a new car, there is a little more wiggle room for a lender to loan and amount that is beyond the sales price. The potential problem here is that, with the automatic depreciation of buying new, you run the very real risk of being upside down in your new car as well. This may develop into a perpetuating cycle and one that you want to avoid.
Another problem that presents itself here is that you may have to settle for a smaller car to qualify for a loan that takes in your previous loan. Going smaller may work fine if you are the only person who rides in your car. However, if you have more passengers that you need to carry going smaller can, of course be problematic.
With a little bit of looking, it is possible to find attractive lease offers with payments possibly less than you're making now. The problem here is that a lease usually requires a substantial down payment and if you add your rollover amount to the down payment, your payments will be greatly affected. Your lease deal will be structured by taking the total amount of your rollover and down payment and dividing them by the number of months indicated in the terms of the lease.
Getting Back on Top
No matter which route you choose, do your best to put aside any savings afforded, whether in payments or repairs and get yourself into a car where you won't be upside down in the future.