 |
Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
My car's upside-down!
Dear Dr. Don,
I need a lower car payment, but I'm too upside-down in the
car to trade. Should I trade anyway and be upside down in the next
car too, or should I refinance what I owe?
Tires Higher
Dear Tires,
When you're upside-down in an auto loan, you owe more on
the loan than you could reasonably expect to get by selling the
car. You can't pay off the loan with the proceeds from the sale,
so you're stuck with the car and the payments.
Getting a lower payment on your car loan requires
a lower interest rate, an extended loan term, or both. Car loans
are securitized loans, meaning that the lender has a security interest
in the vehicle until you've paid off the loan.
Story continues below
Any lender willing to loan you enough money to pay
off the existing loan will have a loan that is only partially secured,
since your loan balance is higher than the car's market value.
That means that a lower interest rate isn't likely.
To get a lower payment, your focus should be on extending
the loan term. Switching from a three-year loan to a five-year loan,
even at a higher interest rate, will bring down your monthly payment
as shown in the table below:
| |
Existing loan
|
New loan
|
Difference
|
|
Loan balance:
|
$10,000
|
$10,000
|
|
|
Loan term (months):
|
36
|
60
|
|
|
Interest rate:
|
8%
|
12%
|
|
|
Monthly payment:
|
$313.36
|
$222.44
|
$90.92
|
|
Total payments:
|
$11,281.09
|
$13,346.67
|
|
|
Total interest:
|
$1,281.09
|
$3,346.67
|
$(2,065.58)
|
In the example you free up $90 a month in your budget
but wind up paying an extra two grand in finance charges.
Bankrate's
auto
loan calculator can do the math for you given the particulars
of your loans. The calculator's amortization schedule will even
provide the total interest expense number.
As you point out, some car dealers will let you capitalize
the negative equity in your car by rolling it into the loan for
a new car. You're going to really pay up for this privilege, losing
any negotiating power in determining both the price of the car and
the interest rate on the loan.
The best approach is to talk to your current lender
about extending the term of your existing loan. They're not going
to want to do it, but if you can demonstrate to them why this is
important to keep you solvent, they should grasp that it's better
to restructure the loan than have it become a nonperforming loan.
-- Posted: Oct. 11, 2002
|
Rate
Alerts
