by Tenebris

Created on: June 24, 2008   Last Updated: November 07, 2008

Sometimes, after a serious accident or when it comes time to purchase a replacement car, a car owner will receive a rude shock: as for the first time it becomes apparent that the old car had been worth less than what is still owed on it. This situation is colloquially known as being upside-down on a loan.

If you find yourself in this situation, you are not alone. According to Edmunds.com, over a quarter of all used vehicles traded in during 2007 had negative equity.

Let's start with the second worst case scenario. If you have made this discovery as a result of a theft or an accident which totalled your car, your insurance money will not suffice to pay off your existing car loan (for the car which no longer exists!); and at the same time you will probably need to find yourself a replacement car. In this case, you will probably have to downgrade your expectations to what you can afford with your insurance settlement, cash on the table. You have already budgeted for the existing car loan so you should be able to keep paying that one off. If you can budget in extra payments, make them.

The easiest downgrade available is that of the used car. Just driving off the lot depreciates a new car by half. To replace your existing car with a used one instead of a new one sidesteps this steep drop in value.

An alternate option here is to work out how much longer the loan has to go at the payment levels you can afford to make, and then to negotiate a lease for that same period of time, total cost not to exceed your cash-in-hand insurance payment. In both cases the idea is to remain within the budget you had already made, and to ensure that you will no longer have negative equity once the original loan is repaid. Do not yield to the temptation to add a new loan on top of the old, even if it means buying a car that falls far short of what you had envisioned. The sooner you pay off the existing loan, the sooner you will be free to look for a better car.

In many other upside-down cases, so long as your existing car still runs, your best option is to hang onto it for as long as maintenance and fuel economy costs do not become prohibitive. So long as it is only equity which is negative, it won't become actively relevant until you try to sell the car or trade it in so if it is at all possible, don't.

However, if the condition of the car is such that you are paying almost the equivalent of an extra car payment in maintenance alone, it may be worthwhile to get rid of it for whatever you

• 1
• 2
• Next Page >>