by Sarah Heller

Created on: September 06, 2009

With the poor economy causing many people to stop shopping for high ticket items, a lot of vehicle owners who borrowed money to purchase an automobile are finding that they cannot sell their car for what they originally paid for it. When a vehicle owner owes more on his or her car than what it is worth, the owner is considered to be upside down on the note.

It is very common for people who opted for 100% financing on a new vehicle to be upside down on their note as soon as they drive the car off the dealership lot. In general, a new car loses about 20% of its value as soon as it can no longer be billed as a new car. Usually being upside down on a note isn't a big deal; most people who just bought a new car have no real interest in selling it. Being upside down does become a problem, however, if you can no longer afford to make the monthly payments or if you cannot keep up with the maintenance on the vehicle.

If this is your situation, start by looking at your transportation needs. Determine if you really need the vehicle, or if you can do without it. Getting rid of a vehicle all together typically works well for people who live in large cities with adequate public transportation, and people who have recently had their transportation needs reduced (as in the case of a job loss) and have access to another vehicle for emergencies and occasional errands. If you do not need the vehicle, contact your lender and inform it that you will be selling the vehicle. Most lenders will write an agreement where the difference between what the vehicle sells for and the amount of the note can be paid off with an additional loan. Typically, these loans have higher interest rates, since there is no collateral to secure the loan, but lower payments can be negotiated by extending the length of the loan. If money is tight, make sure to not agree to a higher monthly payment than you can afford.

If you must have a vehicle, but you simply cannot afford the payments or maintenance, you will need to look into either renegotiating the loan or purchasing a cheaper car. With the first option, call several banks and credit unions in your area and tell them what you currently owe on the car and how much you need the monthly payment reduced to. Realize that most institutions will not refinance an upside-down vehicle without some other collateral or a down payment.

If this simply isn't an option, look into buying a cheaper car, and rolling your remaining loan balance into the new loan. While this can be a dangerous step to take (for many people, rolling their balance into a new car loan becomes a habit, and they are perpetually upside-down on their car), it can be a good option if you are dedicated to paying off the loan as quickly as possible. As a financial counselor, I often tell my clients to use this as a last resort, and then only if they plan on keeping the vehicle at least three years past the end of the new loan period. This gives clients some breathing room between retiring the car debt and saving up for a substantial down payment or outright purchase of their next vehicle.

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