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How to Get Out of an Upside Down Auto Loan
Getting upside down on car loan, sometimes also referred as underwater on car loan means your loan exceeds the current value of your vehicle or in other words you owe more on the loan than you could expect to get by car sale or trade-in deal. As you can’t pay off the loan with the income from selling the car due to the negative equity in auto loan, so you’re stuck with the car and the loan payments.
Of course, nobody likes being upside down on their auto loan whereby the car you want to trade-in is worth $6K and you still owe $10k on it. Despite the fact, almost 40% of the Americans end up being upside down on their auto loans.
Following are the reasons which act against the people to gain equity out of their vehicle while turning them upside down on their loan. However, being upside down can only be problematic to those who are looking to trade-in their car while owing on auto loan.
>>Low down payment or no money down A lot of borrowers avoid making down payment thinking of saving their cash on hand, but it ultimately adds on the interest amount.
>>Longer term Getting a car loan for five years or more can also increase your chances of owe more in interest than you will on the car. Thus, even if your payment seems affordable, in the true sense you are paying a lot more in interest.
>>Rolling old car payment to new car loan Some people with an intention to get rid of this situation transfer their old car’s remaining balance into a new auto loan. And thus add extra debt on their new auto loan which makes them to increase their monthly payments while being upside down all over again.
>>Higher interest rate: While accepting vehicle loan, it may happen that you are forced to take a higher interest rate either due to bad credit or any other reason which leads to raise your payment to interest more than principle.
>>Paying high for car: This happens especially when you buy an automobile from a private seller without checking the blue book value, and end up paying more on your car. While also when you purchase a car you cannot afford.
How to get out of this situation?
Prepayment: Prepayment could be an excellent way to pay off the loan faster. However, you need to make sure that your current loan does not include any prepayment penalties that could restrict you from paying additional cash. Thus, you can make extra payments each month and can get rid from being upside down.
Refinancing upside down car loan: Car loan refinancing can also be a good option to lower the interest rates while redefining your loan terms such as shortening your term period which can help you from being upside down. However, sometimes lenders does not provide you traditional refinance car loan, in such a case you can opt for a home equity loan which is a type of secured loans and have comparatively lower rates. Getting this loan can help you to pay off your loan quickly without spending extra cash.
Avoiding the situation in future:
Making the down payment (at least 20%). Not having loan terms more than 5 years. Prefer buying a used car as new cars depreciate much faster. Keep your car loan payment limited to 20% of your income.
Do You Know If You Qualify For Obama's Federal Loan Modification Plan?
Find out if you qualify for a loan modification under Obama ‘s new Federal plan. This plan offers an unprecedented $75 billion for up to 5 million homeowners who qualify for free assistance. So if you find yourself struggling to keep up with your mortgage payment, if you have made late payments, and especially if you have been fearing foreclosure on your home, learn how this plan can help you keep your home.
Even homeowners who have been turned down by mortgage lenders are eligible for consideration under President Obama’s new plan. Any participating Bank is required to review any borrower who requests their help. Under this new plan, the rules have changed. You do not even need to be delinquent on your mortgage. In order to apply, you simply need to gather the required paperwork to show that you may be at risk. The main thing you need to demonstrate is that you are faced with financial hardship due to your current interest rate, loss of income, or increased expenses.
Here are the basic guidelines to qualify for help. Under the Obama loan modification program, you need to demonstrate:
— that the mortgage is on your primary residence; — that your mortgage payment balance totals $729,750 or less; — that current mortgage payments is over 31% of your gross monthly income (this includes any taxes and insurance); — that your current loan originated prior to January 1, 2009.
To apply, you will need to supply your lending bank with proof of income, and complete the bank’s application forms, where you will detail your income and expenses. Full disclosure is required in order to be approved. Just be sure that your paperwork is complete, once you meet the basic guidelines for approval listed above. The bank reviews each applicant on a case-by-case basis.
The Treasury Department has been encouraging any interested homeowners to gather their required documentation ASAP, since they expect lenders to be swamped by loan modification requests. While the program is free, you will need to take as much time as possible to get all the paperwork together. You want to maximize your chance for approval, so the more complete your documentation, the faster it will go once you start. Millions of homeowners may now qualify for a second chance at getting a lower monthly payments on their mortgage, so you want to take the time to do it right, since so many will be applying. Give yourself the best possible shot at a piece of the Obama loan modification plan.