Applying for upside down auto loans can take some time, as lenders are careful in choosing which loans to fund if the total amount financed exceeds 100% of MSRP for new vehicles or 100% of book value for used vehicles. If you are seriously considering an upside down auto loan, you are probably unhappy with your current vehicle. Regardless of why your current vehicle no longer meets your needs, be sure to think long and hard before signing the contract.
In this sense, an upside down auto loan is equivalent to paying twice for the negative equity (negative balance between your trade’s value and your payoff). Any balance beyond the dealership’s trade allowance must be refinanced in your new auto loan. By refinancing a remaining balance, you are essentially paying for your trade-in vehicle for the term of your new loan, plus the number of payments made on your first loan. Your negative equity is now being amortized over a very long period, meaning you will pay a large amount of interest.
Be up front with dealerships if you are considering an upside down auto loan. If you owe thousands of dollars more than your vehicle is worth, let your salesperson know. If anything, being up front with a salesperson could get you more for your trade-in or a larger discount off of the new vehicle, both of which help to reduce negative equity.
After you have found the right vehicle and have your trade appraised, it’s time to look at your monthly payment. Be prepared for the salesperson to show you some very high monthly payments. Remember that in an upside down auto loan, you are financing two components, the first being your new vehicle and the second being your trade-in’s negative equity. You will also notice that the estimated interest rates used in your quote are also quite high.
Interest rates on upside down auto loans can vary wildly, with rates up to 15% APR and even 20% APR being possible, depending on your situation. The dealer will err on the side of caution when quoting monthly payments and interest rates, so ask if you can complete a credit application. It is only once the structure of a sale (including trade-in value and your credit statement) is submitted to the lender that you will have a concrete answer on interest rate, maximum amount financed, down payment required and the like.
When you find out the terms you qualify for, you can get a concrete payment quote and make an informed decision. When speaking with the dealership’s finance manager, ask if there is any way to lower your rate. Most dealerships have a “buy rate” at which they buy the financing and a “customer rate” that is shown on your contract. Pocketing the difference between the payment at the buy rate and at the sell rate is a major profit center for the dealership, and it can cost you hundreds or thousands of dollars in interest.
When purchasing your vehicle, ask the dealership about GAP insurance. GAP insurance will pay the remaining balance on your vehicle in the event it is totaled and the actual cash value of the vehicle is lower than the payoff.