How to Get Out of an Underwater Car Loan

May 13th, 2013 by

LoansYou’re in a car loan whose monthly payments you can no longer afford, but the balance you owe on the loan is more than the car is worth, so you can’t afford to get out of the loan either. Read on to find out how you can get out of your loan and save a ton of money.

You had to do it. That shiny, new, red Camaro, with its 3.6 liter grumbly V6 was begging for you. You felt comfortable in your job, had saved up for the down payment, and decided it was time for that long-awaited treat. Your friendly new car dealer got you a deal: $25,000, and with interest rates as low as they are, you could add an extended warranty, GAP insurance, and protection against wheel damage and key loss and still end up with payments around $565 per month ($25,000 just became $34,000 in a blink!). Sure, that’s a lot of money, but this was your dream car and it seemed like a great deal…so you signed on the many dotted lines and drove off in your new baby.

Your “dream car” is now two years old with a couple of small dings, and it needs new tires. You get married, the first baby is on the way, you buy a home, your last two raises aren’t as big as you planned, gas prices are applying pressure on your budget, or all of the above. Suddenly, the payments on that dream car are now hitting you hard each month. You’ve now discussed it at length, and the smart move is to get out of this car loan and get into a vehicle (and monthly payment) that makes more sense.

Your dealer offered you $17,000 for your Camaro, but you owe the bank $23,000 so that’s not an option. You list the car for $23,000 on Craigslist and AutoTrader, but nobody is calling you because others just like yours are listed at $20,000. You could sell it for $20,000, but where are you going to get $3,000 to get out of the loan? It seems like the only option is to keep making those payments that now just seem ridiculously high for a car that no longer fits. What can you do?

There is another option. No one considers it because no one knows about it, but it is the smartest way to go. And it’s easy. Sell your car for the best price you can get, either by yourself or through a car consignment store like CarLotz, then take a personal loan or home equity loan for the difference. You can then get yourself into a car that makes sense for you…one that you can afford. Here is how the math works:

  1. Using the example above, you still have about 40 months of payments at $565 a month.
  2. If you sell your car for $20,000, and let’s say you spend $1,000 to sell it, you will take a personal loan for $4,000 to fill the gap…that personal loan, even at a slightly higher interest rate, will cost you about $120 per month for 36 months.
  3. Go get a good used car that fits your current lifestyle, spending maybe $12,000 all in, as there are lots of great cars at that price. If you finance the new car 60 months at a reasonable interest rate, you’ll owe $225 per month for 60 months.

So there you are. By getting out of your old loan through a sale and a new personal loan and purchasing a lower priced vehicle with a lower monthly payment, you will save $220 per month for the next 3 years. After that, you’ll be saving more because your personal loan will be paid off.

If you can’t get a personal loan, and you don’t own a home with which to secure a home equity loan, consider a loan from your 401K, or even getting a cash advance from a low interest credit source if available. With a savings of $220 a month, in this example, you actually have several options that will work in your favor. It’s very easy.

If you’d like to learn more, visit CarLotz at or call us at 804-308-9592!

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