A A A

    We all know what it means to be upside-down in the physical sense. The blood rushes to your head and it's hard to breathe, all because it's not the natural state of the human body. In vehicular terms, being upside-down is a completely different, yet equally unpleasant phenomenon. When it comes to your car, truck, minivan or SUV, being upside-down in your car loan is not a physical problem, but a financial one.

    In car dealership slang, it simply means that, late in the life of your auto loan, you still owe more money to your car financing organization than the vehicle is now worth.

    How Does It Happen?

    Here's an example. You buy a $30,000 car with $2,500 down, finance it over a common 60-month term, but in three years you decide you want to sell it. Your payoff on the auto loan is $18,000, but your car is only worth $15,000 at this time. This means you are $3,000 upside-down, because in order to pay off your original auto loan, you would need to make up the difference between what your car is worth ($15,000) and what the car loan payoff is ($18,000).

    Being upside-down in an auto loan isn't all that uncommon these days, although there are no published industry figures. Jim Moynes, vice president, automotive marketing for Ford Motor Credit Company, one of the world's largest auto finance companies, says that "negative equity," or being upside-down, depends to a great extent on how you structured your purchase in the first place.

    He says, "A large portion of the vehicle's depreciation occurs in the first two to three years of ownership, regardless of make or model. Loans amortize over the term of the loan you took out, and typically there's a period there where the depreciation outpaces the amortization. When you're in that period, you're in a position where you have negative equity. Once your amortization crosses over that line of the depreciation curve, which typically flattens out as the vehicle gets older, you get back to equity."

    Longer-Term Auto Financing

    Moynes says that the ready availability of longer-term auto financing, car loans that are 48, 60 or even 72 months, means that it will take longer to get into an equity position with your vehicle. He also points out that, just because you get into a negative-equity situation with your car loan, it won't necessarily affect your overall credit score, but it could affect your purchasing power, and it could impact the auto loan rate you get for your next loan.

    Moynes explains that extended-term financing isn't necessarily a bad thing. "It all depends on buying habits. That might be OK for the consumer who likes to keep vehicles for extended periods, and that's certainly a stronger option for all consumers, because of the ever-improving quality of vehicles. It does improve affordability, and as long as it matches up with the trade-in frequency, then they're perfectly fine and it will work very well for them."

    He goes on to clarify where the real risk lies. "If you're a consumer who likes to purchase a new vehicle on a fairly accelerated frequency, say 24 to 36 months, then that extended financing may mean that you end up with negative equity when you go in to trade your vehicle."

    Lease or Buy
    Moynes says that if you are the type of consumer who likes to drive newer vehicles all the time, trading in every 24 to 36 months, perhaps car leasing would be a better deal than long-term car financing. "For many consumers, leasing allows them to get into a new vehicle with the finance company assuming the responsibility for the residual value, what that vehicle will be worth in two or three years, so you can turn it back in and have a worry-free transfer experience into your new vehicle."

    He notes that certain types of drivers should be wary of leasing. "There are mileage restrictions, so if you drive a lot of miles, you may have to pay a mileage penalty. If you have a truck and you take it off-road, there can be excess wear and use charges. If you like to upfit your vehicle or put aftermarket equipment on it, that probably won't be allowed."

    How to Mitigate Your Risk

    Moynes says a consumer should structure an auto loan with the down payment large enough so that the monthly payments, the number of payments, and the time he or she wants to keep the vehicle match up as closely as possible to avoid getting upside-down.

    Co-signers, or as Moynes calls them co-buyers, adults who may help their sons or daughters buy a new car with their better credit ratings and credit history, should also be wary of long-term car loans, because they are liable for the full payment of the obligation that they sign up for.

    Consider using an auto loan calculator to enter the price of the car, the value of your trade-in (if any), your car loan rate and loan term to determine your monthly auto loan payments.

    "You can offset the amount you're financing by making a larger down payment. You should also take advantage of any programs that the manufacturer might be offering, whether that be a low APR (annual percentage rate), or cash rebate offers that help reduce your balance. That can certainly help the situation," says Moynes.

    Shopping for a Car?

    - Car Buying FAQ
    - Buying Cars At Auction

    - Car Dealer Secrets Revealed: The Loan Officer

    For more information on this topic, visit our Car Loans center.

    Quick Shopping Tools:

    Research New Cars

    Cars for Sale in Your Area

    Get Repair Estimates

     
    Discuss
    1 - 20 of 49 Comments
    dezterriblez Sep 09, 2010 1:26 AM
    I went upside down and got behind on my car payment. http://www.drivercredit.com helped me while the others just sent me to the dealer. Ask for Jamie Hurley!
    Report This
    ksdjhfkdshfk Mar 12, 2010 7:21 PM
    axxicl Aug 07, 2009 4:58 PM welcome to -----------------www.goladymall.com Wholesale and retail all kinds of world brand shoes,jeans,t- shirts,bikini,beach pants,handbags,wallets,sunglasses,belt,caps,watches etc.. Free shipping!free return!lowest price! No any extra cost!
    Report This
    axxicl Aug 07, 2009 4:58 PM
    welcome to -----------------www.netsowntown.com Wholesale and retail all kinds of world brand shoes,jeans,t-shirts,bikini,beach pants,handbags,wallets,sunglasses,belt,caps,watches etc.. Free shipping!free return!lowest price! No any extra cost!
    Report This
    axxicl Aug 07, 2009 4:57 PM
    Wholesale and retail all kinds of world brand shoes,jeans,t-shirts,bikini,beach pants,handbags,wallets,sunglasses,belt,caps,watches etc.. Free shipping!free return!lowest price! No any extra cost!
    Report This
    hhuie7 Aug 05, 2009 3:01 PM
    I believe ALG (Automotive Lease Guide) is the company or one of the company's that create the residual value of vehicles and that's based on popularity, quality, and demand and cars depreciate 50% - 75% after 3 years and more then 25% depreciation once you drive off the lot (Demo vehicle). This rate fluctuates depend on how the car market is (Once people started ditching the SUV this rate was cut in half which resulted in Ford/GM losing a lot of money when people turned their vehicles in after a lease) I don't believe there is a legal way of resolving a upside-down loan unless you trade in the vehicle and roll the difference into your next purchase. Best solution to this issue is to not get yourself into this situation (Easy said then done). Always get the car loan from a Bank or Credit Union. Dealers would get a similar rate and take on an extra 1 - 3%. Try to purchased used cars that are at least 3 years old and get a Carfax and bring a car mechanic to inspect the vehicle to see if there are any problems with the vehicle.
    Report This
    vr6ohmy Aug 05, 2009 1:04 PM
    I think you need to be a bit more honest tess03. I was in the car business for almost 10 years and only some of what you're saying is true. The first tactic in any financed transaction is to work off of what the monthly payment will be. It's easiest to speak with someone about $500 a month rather than $30,000. Sales teams are always told to work the monthly payment end of the deal rather than bottom line because it is indeed VERY confusing to the everyday Joe. I will also say that I agree with esm72 about leaving the trade out of the equation until a final price is agreed upon by both parties. The price you pay for the car MOST DEFINITELY hinders on what the dealer gives you for your trade in. If you're willing to take next to nothing for your trade, they'll budge on the price of the car, but if you want top money for your trade, you'll pay sticker, maybe a couple hundred less and that's it. HOWEVER, i do agree with you that car dealerships deserve to make money just like anyone else. If anything, car dealers have the biggest challenges when it comes to making money based solely on the generalized reputation that THEY have established for themselves. If a lot of the "tactics" such as 4 square sheets and selling based on monthly payment were left out of the equation, then the whole process would be much easier.
    Report This
    esm72m Aug 05, 2009 1:03 PM
    i worked in the business 10 yrs. I guess the terms "knocking someone's head off, and CBS (can't buy s**t) don't mean anything huh? What about "whoever picks up the pen first after a deal is offered loses" Don't know that term either? maybe the finance manager telling sales people that the dumber you are in regards to finance, the more money you will make, meaning don't give information, let us handle it. Sure your entitled to a career, and hopefully you are successful at it, but I won' let you intimidate me with your rhetoric and spin from letting people know they should educate themselves. It makes me sick to my stomach what kind of human being I was during that time, not to mention the middle aged, druggies I had to work with, all while making a living. I know how to take your trade and get it for free, I know how to add calls to interest rates, I know how to add money on the back end if I have to lose on the front end on price. Not to mention the ridiculous hours that are required, and the number of sales people that are recruited in order to get as many contacts as you can in order to cold call the state. The fact is that the industry and it's reputation have done this to themselves. Just like folks who pay insurance premiums for years only to get the damn run around when they have a claim. Don't even get me started on used cars. With your knowledge, I hope you find a career maybe in banking or something else if and when u see the other side. Maybe your conscience just hasn't reached the point mine has. The thing that aggravates me the most is that those who can buy, with good credit, are the ones we made the least off of, its the ones who are on the edge, between secondary and primary financing, or uninformed that we knocked their heads off, as the term goes. Fortunately, unlike many 50-60 yr old men, and some women who have jumped form dealer to dealer, or can't do anything else, I got out of it. Good luck in your career, but I don't see how you can spin that your doing such a service to people. If they knew the names their called, and the jokes made about them on the lot, or in the office, they would never buy a car.
    Report This
    covert1970 Aug 05, 2009 1:02 PM
    lydette0504: You are obviously not educated in purchasing vehicles and neede someone sho is to advise you before making any decision. Most long standing reputable dealers will not hoodwink you and treat you with ************** a bit about trust. if you don't know anyone who is familiar with the process ask qaround for a referrede salesperson aqt a long stand ing dealership qand do some deep research before making a decision. There is no such thing as luck.; "Luck is where preperation meets opportunity " !!!!!!
    Report This
    covert1970 Aug 05, 2009 12:52 PM
    In the current automobile market no one knows what the projected values of current model year, 2009-2010 vehicles is going to be. If the actuaries who figure residual values for leases won't make any REAL estimates, the best you will get is a WAG (Wild A** Guess) . I spent over thirty years in the retail auto industry, have done extensive eduacated research, and even in the high end market for automobiles, BMW, Merced., Porsche, and with Hyundai entering the market with a top notch, long waranteed vehicle with amenities that Lexus, Infinity and the others haven't even thought of the market is so upside down that the professionals won't even do a lease that is over one year and plan to take a big hit in the residual value, due to the current conditions. Used car professionals are baffled at the prices and values to the point that sales of late model used vehicles are down thirty-five % and more in some places. This $4500.00 incentive from the government is turning the used parts businerss upside down too. Who knows if GM will still be here in two years, or Ford and Chrysler. Toyota's sales. Honda, and Mitsubishi are off even with the "Cash for Clunkers" program much more than expected, 28% marketwide. Hyundai, Kia and one other are in a prime position to increase sales with their warranties and the quality of the product, I would look there. Don't ever commit to a payment, use the bottom line, out of the door price with no add ons, and use a spread sheet for a real comparison. go to a bank, apply and get pre approved for a new car loan up to sixty months at the best rate possible and take all this information with you. if you have a trade, do not even intimate that fact until myou have an out the door price, and remember with the trade comes a lowering of slaes tax as the tax is figured on the difference between the two vehicles. S.C. and N.C. have a maximum of $300.00 in sales tax on vehicle sales so that is not a real issue in those two states. Use a spread sheet with all of this information and the payments on a per $1000.00 basis for sixty months from your bank at the interest raqte that you were quoted there. This will assure you of the best value for your dollar and lkeep you from being upside-down ! Information is a powerful weapon when used correctly !
    Report This
    tess03 Aug 05, 2009 12:31 PM
    esm72m......you do not know what you are talkling about. Before you pass information on to others, you need to look into what you're saying. I am a finance manager at one of the top Cadillac dealers in thr country and can tell you a $4000-5000 down payment makes a HUGE difference when to the bank. There is such thing as Loan to Value on a vehicle. If you are paying for example $20000 (which is fair market value) and then adding tax, title, license, etc. you're loan to loan to value will be over 100% which will increase your rate and/or whether bank of america will approve you or not. That money down could make or break to financing part of the deal. Also, at most dealership IF and only IF you are quoted a payment, we will always quote based on tier 1 credit. That's how we sell vehicles. The reason we asked where your last vehicle was financed was A. to call and get a payoff or B. to get an idea of where we should be quoting rate wise. It's only so we can be more upfront with you. People working at car dealerships are not "OUT TO GET YOU" just like you go to work everyday, so do we. We are entitled to get a paycheck and make a living. Dealerships wouldnt be in business if it wasn't for money, neither wold the Target, or Kmart. Next time you decide to post educate yourself.
    Report This
    tess03 Aug 05, 2009 12:31 PM
    esm72m......you do not know what you are talkling about. Before you pass information on to others, you need to look into what you're saying. I am a finance manager at one of the top Cadillac dealers in thr country and can tell you a $4000-5000 down payment makes a HUGE difference when to the bank. There is such thing as Loan to Value on a vehicle. If you are paying for example $20000 (which is fair market value) and then adding tax, title, license, etc. you're loan to loan to value will be over 100% which will increase your rate and/or whether bank of america will approve you or not. That money down could make or break to financing part of the deal. Also, at most dealership IF and only IF you are quoted a payment, we will always quote based on tier 1 credit. That's how we sell vehicles. The reason we asked where your last vehicle was financed was A. to call and get a payoff or B. to get an idea of where we should be quoting rate wise. It's only so we can be more upfront with you. People working at car dealerships are not "OUT TO GET YOU" just like you go to work everyday, so do we. We are entitled to get a paycheck and make a living. Dealerships wouldnt be in business if it wasn't for money, neither wold the Target, or Kmart. Next time you decide to post educate yourself.
    Report This
    youlivefordior Aug 05, 2009 12:27 PM
    Cars are a complete waste of money...They are all overpriced, cars all do the same thing, which is to take you from one place to the next. I laugh at those hot heads who drive those hummers, and Range Rovers as if those vehicles dont smash, and break down like any other Cars.... I used to drive a Lambo and the stupid piece of **** didnt even come with a Cup Holder...A simple Cup holder...Its cost 10 times the price of a reugalar Car and you would think that it would at least have the basics, before all of that fancy ********....
    Report This
    marcia824g Aug 05, 2009 12:09 PM
    Well, I am thinking about getting my first new vehicle. I am soon to be 41 years old with 2 children and a husband. I've always made sure that everyone else was well taken care of with me only receiving what was left. Now that our oldest is 22 years old and our youngest is almost 16 and a junior in high school. I feel comfortable about allowing myself to get some of the things that I would like before I get to old to really enjoy them or myself. So, I have figure out that I will try for a Toyota Sequioa 2010, with a 72 month contract with possibly about $6000 down on it; hopefully with other insenitivie from the dealer and the car maker. We've figured our payments to be around $700 a month. But our plan is to send $900 or $1000 a month in for at least 4 years this way that can knock off at 9 months to a year of payments. Then we are going to build our new house from the ground up. This is my plan, my husband has always kept a new car for at least the last past 10 years. But now it's my turn.
    Report This
    esm72m Aug 05, 2009 12:09 PM
    NEVER make a down payment until AFTER you have a final sales price and trade value. they will use your down payment in the deal as pure profit. If bank of america is going to loan you 25k for a car or truck, do you really think 500-4k down payment makes a difference to them? watch for sales terms like "we need a little help to make this go through, or so the bank knows your serious buyer&********** rubbish, and, I would never even mention a trade either till the last minute. Do not disclose who your current loan is with, as this is just a way to see what kind of credit you have so they don't waste time with you. You are being prejudged, don't be naive. Always talk in terms of drive out price, NEVER let them talk to you in payments...Unless you have a financial calculator in hand, don't sign anything regarding payments or on the spot. Go home and take that "payment" and plug it in to an online spreadsheet and see what your interest rate really is. You won' t know if you use their financing until you get to the office to sign. WHY AM I SAYING THIS. cause I want you to be informed. I don't care about salespeople cussing me out, and saying I'm hurting their families..Screw you. you lying and cheating thieves are why consumers need to be educated. Car sales, insurance industry, and potato chips are 3 of america's biggest rip offs.
    Report This
    lydette0504 Aug 05, 2009 12:02 PM
    @ ummyeahok ...I just think you've run into bad luck thats all. I'm sure there are a few people that have those bad intentions but I'm a working class woman who's looking for solutions to make my life and situation better and does not like to take the easy way out to get by. This forum is for advice and suggestions and if you can't offer an intelligent advice or opinion, you shouldn't comment at all. Please don't generalize people in a degrading way without knowing their situation and status.
    Report This
    ummyeahok Aug 05, 2009 11:59 AM
    We own 4 cars despite being a 2 person household. One is a show winning 1994 mustang convertible, the other a 1988 BMW convertible, another is a 1985 porsche 928, and our newest vehicle, a 2003 dodge neon. They are all high mileage and are all reliable, and theyre all paid for. Each was only a few thousand (technically the BMW was free) What I dont get is all these people who are upside down, and owe $30k+. They will always compliment us on our cars and how cool they are... ...They can never understand how we have so much with so little, and how were not the ones with money troubles.
    Report This
    ummyeahok Aug 05, 2009 11:54 AM
    I am so terrified of these upside-downers... ...Im afraid that they'll crash into me on purpose in hopes that the insurance payoff will give them a fresh start. I cant tell you how many times in this year alone I have been run off the road by these people! Another thing is, I onder knew someone who owed more than their cars worth, and that car was 8 years old!!!! Like the article says, the most depreciation is during the first 2 years, I dont know when she bought that car, or how much, pretty sure it was used. But I cant see how something like that can happen. Its not like its a TV (pay $1000 new, its worth $100 within one year)
    Report This
    lydette0504 Aug 05, 2009 11:06 AM
    karli- you and I are in the same predicament. I don't think there's any way out except to trade in our cars and get into a new loan, with a better, more dependable, if possible, lower monthly payments. Its a cycle of bad habits in this economy. I'm stuck too. :-/
    Report This
    lydette0504 Aug 05, 2009 10:58 AM
    hmmm... although the GAP insurance sounds quite good but with my luck, there would be a surveillance video following me :/ But in reality, I wouldn't want to take that route. I agree about the crazy depreciation values and the banks stealing our money. I definitely need to get into a lower monthly car payment...$500 a mo plus NY insurance is no joke!! :-/ If I was single and no kids, then I'll manage it but thats not my case. I'm almost convinced to just go to the car dealership and get a new loan just so my payments will be lower...thats if...the bank will let me do that. This is harder than I thought....
    Report This
    karlibaby37 Aug 05, 2009 10:56 AM
    Help! so I am really in the upside down with a car note of 72 months, I owe more than the car is valued since '05; I've made extensions of this note and I have no down payment other than my trade in...now there is no way I can come up ahead, not even in an equal offset...does anyone know any info that might help me. Thanks
    Report This
    1 - 20 of 49 Comments
     
    Leave A Comment?
    Please keep your comments relevant to the Is Your Car Financing Upside-Down? article.
    Advertisement
    Mapquest Gas Sweepstakes

    Featured AOL Autos Editors

     
    Fetching latest post ...
     
    Fetching latest post ...
     
    Fetching latest post ...

    Great Auto Loan Rates

    Low Rates on New and Used Autos

    Presented By Apply In One Easy Step »

    AOL Autos Facebook Activity

    FIND A GREAT USED CAR

    Just Say - SHOW ME THE CARFAX
    Order Carfax Report
    Powered by
    Get a free CARFAX record check for a used car
    Go >>
    Follow AOL Autos on Twitter
    When your car is worth less than you own on it, then your car financing is called "Upside Down." Learn more about how this happens and what you can do to prevent it.
    ABUSE REPORT

    From:

    Your Comment:
    Send Report Cancel