Escaping an Upside Down Car Loan

After I wrote about doing a year end financial review, a reader shared a problem that they were having:

Briefly, here’s the situation. I “inherited” a vehicle from my ex-wife through divorce. She declared bankruptcy and, rather than have the vehicle included in that (it had my name on the lien as well as hers), I took over the payments. The payments are very high [and] are a strain on my budget. I have some options, and that’s where you come in. Which of the three following choices make most sense?

Escaping an Upside Down Car Loan

  • One, just pay it off and tighten my belt. I have 11 payments left.
  • Two, use home equity credit to pay it off, and then pay that off over 20 months.
  • Three, use my savings to pay the balance of the car loan off, then try to pay myself back.

I have another vehicle and don’t need this van, though it’s nicer than my car.

Nickel and I both had the same response – that he should try to sell the car and use the proceeds to pay off the loan, dipping into savings if necessary. This is certainly a tough situation, so I wanted to put together some thoughts on making it happen.

Assessing the car’s value

The first step in getting out of your car loan is figuring out what it’s actually worth on the open market. If you price it too low, it’ll sell fast but you won’t get enough for it. If you price it too high, you might not be able to sell it at all.

  • Consider the demand for your car. If you’re trying to unload a convertible, you’ll probably be able to sell it for more when the weather is warmer. A family sedan isn’ seasonal, so you may be able to get a fair offer whatever season you sell it.
  • Check out Kelley Blue Book as a starting point. But don’t just rely on the numbers from their site. You should also check out local prices on Craigslist, eBay Motors, etc.

Now that you have an idea of what you can get for your car, it’s time to see if you can get a bank to finance the difference.

Handling or financing the difference

While it would be great if everyone could just pay off their loan after selling their car, that’s not always an option. If you have a bit of money saved up, you might be able to use that to cover the difference between the sale price and what you owe on the loan. Just make sure you still have some money left in your your savings account for emergencies.

If you’re looking for possible lenders to cover the gap, here’s a list of some possible avenues to investigate:

  • Local Credit Union/Bank: If you’re a member of a credit union or local bank, check with them first to see if they are willing to work with you on an unsecured loan. Many of them offer competitive rates and the fact that you’re an existing customer may increase your chances of getting approved.
  • LendingTree: If you’re looking to connect with several lenders, LendingTree can be a helpful resource. You submit a single loan request and they provide the information to multiple lenders.
  • Lending Club: Peer to peer lending has grown more popular over the last few years and for some people, it’s a great solution to their problems.

Before going down any of these roads, make sure you have all of your financial documents in order and prepare a logical pitch for why your loan should be approved. Build confidence by creating a realistic budget where you can pay back the amount in a timely manner.

Maximizing your selling price

You can’t just put a for sale sign on the car and hope someone gives you the money you need for it. Instead, you’ll need to think of ways to increase your sales price without spending a ton of money.

Prepping your car for sale

If you want to get top dollar for your car, you should take some time to make it look good.

  • Vacuum the inside of the car thoroughly. If you have stains that aren’t coming off, consider buying a seat cover.
  • Dust the panels and dashboard.
  • Empty all junk from the trunk.
  • Wash and wax the car to keep it pristine.
  • Avoid heavy scents on the inside. Use a light air freshener to appeal to more buyers.
  • Clean both sides of the windows. Dirt can accumulate on the inside as well.
  • Replace windshield wipers if they are in bad shape.
  • Check and replace your car’s fluids.

All of these steps are relatively cheap and in many cases just involves some good elbow grease. By making the car look as fresh and new as you can, you’re giving buyers the impression that you were a careful owner.

Think like a buyer

Just like selling a home, you have to get into the mind of the buyers. If they are buying from a private seller like yourself, they’ll be wondering how well you’ve maintained your vehicle. Gather and organize all the paperwork you have on every car repair and check up done. Be ready to answer questions about how recently certain work was done. A knowledgeable seller makes it easier for a buyer to trust and hopefully buy from.

Thoughts on car loans

One other point I’d like to add for those in a similar predicament is to avoid the temptation of rolling your old car over into a new car from a dealership. I knew someone who did this and it made their finances even tighter. If you absolutely need another car, find a reliable used car as cheap as you can and stick with that until your finances improve.

I hope this guide proves helpful for some people. I’m definitely open to hearing any practical tips or ideas that you might have. Have you ever had an upside down car loan? If so, how did you get out of it?

9 Responses to “Escaping an Upside Down Car Loan”

  1. Anonymous

    I totally agree with you Andria. I did the same thing and it turned out fantastic. I took a loan from a car title loan agency in Hayward California, which is just near by where I live. I think it is an excellent solution for some problematic financial situations.

  2. Anonymous

    In response to this specific situation, I would actually use the equity in the inherited car to take out a car title loan, I’ve done this 3 times, and it worked perfectly. If you know how to choose your lenders carefully, it’s really worth the while, and the best thing is that they don’t take your car away – so you have nothing to lose! I used the services of San Jose, CA Title Loans, I’m not sure where you are located, but I can highlt recommend them. Good Luck anyways, and believe me it’s just a phase, it will pass….

  3. Anonymous

    One thing I have learned through this whole financial crisis and recession, is it does not hurt to ask your bank if they would take less. You will be surprised how willing banks are to settle loans with you and how easy it is to do, especially if you have a good reason. I have a similar issue, where I owe more on my truck than it is worth and it needs about 1500 worth of work to get it running right. A couple dealers offered me about $4000 less than I owe. I do not want to transfer that into a new loan, so I am working it out with my lender to take the offer from the car dealership in a settlement.

  4. Anonymous

    what if you can get a buyer for what the car is worth, and you still need to come up with say a $4,000 difference before the bank gives up the title? What if you don’t have the savings, can’t get an unsecured loan for the difference, even though your credit score is 750+?
    Can you trade in the car for a cheep one and add the hypothetical 4,000 negative equity into the cheep car loan, would this reduce any of the debt?

  5. Anonymous

    Figure out which car you actually want to own, and sell the other.

    I’d likely take both vehicles to CarMax and get them appraised (free service), after having them thoroughly cleaned / detailed. CarMax will purchase your cars on the spot, without requiring you to buy from them — and they will wait out the title paper-work too. I think their appraisals are good for 30 days, so you will have some time to think over their written offer.

    Since you only have 11 payments left, you can’t really be that far upside down anyhow. If you decide to sell the upside-down van, you will need to write a check for the difference when you sell to have the bank release the title.

  6. Anonymous

    Great article!

    There is one hang-up that you may run into when selling a car that is upside down, however. In many states, the bank holds the title to the car. Even if you do find someone to buy it, they may not be willing to pay you for the car, let you pay off your loan with their money, and then wait for you to get a title back from the bank to give to them.

    This isn’t a problem with local banks or credit unions because the buyer and seller can go to a local branch where the title is located. It can be a big problem with large finance companies who hold all their titles in a corporate office somewhere.

    As far as your advice for selling a car, that is excellent. There are some other steps people can take as well, which I mention on my site ( You really boil it all down to the main idea when you say: “Think Like a Buyer.”

    One final point, I couldn’t agree more about not rolling negative equity into a new loan. You just dig your hole deeper and I’ve seen people get into real financial trouble doing this.

    Keep up the great work!

  7. Anonymous

    Maybe I’m confused but his situation does not seem to be an upside down loan but more of an undue burden brought on by divorce. Althugh I guess the situations are similar.

  8. Anonymous

    I’ve heard ads for a local Kia dealer that says they will roll a loan even with a $7000 difference between trade-in value and loan balance. That is just ridiculous. Does the person with the predicament have any equity in the other car? Would selling either vehicle solve the budget problem? If it’s not really consequential, put both on the market and see which one sells first.

  9. Anonymous

    I like your ideas of looking to non traditional sources for getting a loan, i.e. Lending Tree & Lending Club.

    I think if more people started utilizing theses resources and took money away from the banks then maybe banks would go back to the basics of lending money and not engaging in secondary markets.

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