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How to Get Out of an Underwater Loan

Finance | 02/10/2022 23:00

Ok, let’s get one thing straight – if you have an underwater car loan, it doesn't actually mean that your car is under water. But, in many ways, it can feel just as helpless. And, while being in an underwater loan is less than desirable, it is probably more common than you think. 


But fear not! Today we are diving (pun intended) into the world of underwater loans. We’ll look at how you can get out of a negative equity situation – or even avoid the situation in the first place!


Here are our top tips on avoiding underwater loans and how to get out of an underwater loan if you have one.


Everything you need to know about underwater loans


What does being underwater on a loan mean? How does a loan become underwater?

Whenever you take out a loan, whether it’s on a house or on a car, you run the risk of your loan becoming underwater. Being “underwater” simply means that you owe more than your asset is worth. 

While we all like to think that we are expert researchers who make thorough decisions, that is sometimes not the case. Buying a car is exciting, and it is way too easy to get swept up in the excitement of car shopping and end up in a bad deal. The bottom line is there are many reasons a loan can become underwater.


You put zero money down

This is one of the quickest ways to end up in an underwater loan. Cars lose about 10% of their value the minute you drive them off of the lot. By the end of the first year, your car will be worth about 20% less than when you bought it. So let’s do the math on that.


You took out a loan for $25,000 for the cost of the car with zero money down. This means that second you drive the car off the lot, your car is worth $22,500. But your loan is still for the entire $25,000. Just like that, your loan is underwater.


You paid too much in the first place

If you didn’t do your research, you may have paid too much for the car from the get go. If your car was actually valued at $28,000 but you took out a loan for $30,000, you were underwater in your loan from the beginning.


You took out a long term loan

The longer your loan repayment is, the more likely you are to end up underwater. If you are using an 84 or 96 month repayment, your monthly payments likely cannot keep up with the depreciation. 


Your car was out of your budget

If you took out a loan with the lowest monthly car loan payments possible because you just HAD to have that particular car, it’s easy to end up underwater. Whether your payments are too low to keep up with depreciation or you miss payments here and there when you can’t make ends meet, the result will be ending up in an underwater loan. 

This can also happen by saying yes to all of those add ons from the dealership. The upgraded sound system, the fancy integrated computer system, the all-weather mats; these all add up and add on to your monthly payments.


You had a rollover loan

If you owed money on your last car, the dealer may have rolled that remaining amount into your new loan. In this case, you are essentially paying for two loans at once. This can easily make your loan amount much higher than the value of your new car.


You had a high interest loan

If your credit score and credit history were not great, you may have only been eligible for a loan with a higher interest rate. The higher rate makes it much more difficult for your payments to keep up with depreciation.


What steps should you take to avoid getting into an underwater loan?

As the saying goes, an ounce of prevention is worth a pound of cure. So what steps should you take to avoid getting into an underwater loan in the first place?


Purchase GAP insurance

Guaranteed Asset Protection (GAP) insurance is one of the best ways to prevent a loan from becoming underwater. GAP insurance is designed to cover the difference between what your car is worth and what you owe. GAP will protect you from depreciation (as well as cover you when collision and comprehensive coverage do not). 


Put money down up front

Experts recommend always putting a down payment on your car. Putting 20% down will give you a good head start on the depreciation that will immediately start accumulating.


Do your research – thoroughly

Make sure you know what the car you want is worth before you even step foot in the dealership. Use websites like Kelley Blue Book and Edmunds to get an accurate idea of what you should be paying for your new ride. 


Think about a realistic repayment period

The longer your repayment period is, the more money you will end up paying in the long run. After all, you are paying interest on that entire period. On top of that, the older your car is, the faster depreciation will creep up on you. Keeping a shorter repayment period will ensure that you save money in interest AND stay ahead of depreciation.


Pick a car within your means

Car shopping can be so exciting and it’s easy to ignore the budget that you know deep down you should follow. But you need to make sure that the car you pick has payments that are manageable. Sit down with your budget and determine what you can comfortably afford, keeping in mind that unforeseen emergencies pop up and you never want to end up stretched too thin financially.


Keep this in mind when you are picking out your addons and upgrades as well – some of those additional items can easily add thousands on to your total loan.


Make sure you have a good credit score before you finance

Your credit score is the main contributor to the interest rate you will be offered. The higher your credit score is, the lower your interest rate will be. Get a copy of your credit report beforehand and look for any areas of concern. Was anything misreported? If there is an issue, report it immediately to the credit bureau. 

How do you get out of an underwater car loan?

But what if it’s too late and your car loan is already underwater? Don’t fret. As long as you are not in a rush to get rid of your car, there are a few steps you can take to chip away at the difference between what the car is worth and what you owe.


Continue making your payments

Keep making your scheduled regular payments. Once you own your car and it is your asset, you can decide what you would like to do, either sell it, keep it, or trade it in. But at that point you will have equity in the vehicle.


Make additional payments

If you are able to make extra payments on your loan, it will help bridge the gap between what you owe and what the car is worth. You can get ahead of the depreciation by being consistent with extra payments. You can even look into paying the loan off entirely if you have the capital to do so. But be sure to check your loan agreement to see if there is an extra fee if you pay off your loan early.


Refinance your loan

This may not be possible depending on your situation, but a car loan refinance might be worth a shot. Traditional banks typically do not refinance underwater loans, but a local bank or credit union might consider it. If you are able to refinance your car loan, you might be able to pay off the car faster.


Sell your car

If you are desperate to get rid of your car, you can always sell it privately. Selling your car privately will get you more money than if you were to go through a dealer. Do some research on Kelley Blue Book to find out what your car is worth, and try to honestly assess what condition it is in. Give your car a good detailing, fix any maintenance issues, and advertise locally as well as online. You might be able to sell your car and pay off most of the loan from that sale. 


This has other drawbacks of course, the main issue being that you will no longer have a car. But this will depend greatly on your personal situation and how bad you want to be free of your car.


And that’s everything you need to know about underwater loans.


The best way to get out of an underwater loan is to never get into one. Be sure to do your research and purchase GAP insurance when you take out your initial loan.


At Auto Approve, we know how important GAP insurance is, which is why we make sure your new loan comes with it when you refinance. 


If your loan isn’t underwater but you are having trouble keeping up with payments, it might be time to refinance with Auto Approve. We work with lenders to find you the lowest interest rates around and can change your repayment plan to make your payments more manageable.


So if you want to refinance a car loan, get your free quote today!

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The 3 Best American Road Trips To Take This Year

Thinking about a road trip this year, but not sure which of the many amazing classic American road trips to take? You’re in the right place.While it’s hard to say that any one singular road trip is the best most beautiful roast trip to take – the United States has tons of interesting terrain, stunning vistas, and cultural landmarks from sea to shining sea – we’ve compiled three favorites that you can start planning right now.There are many more great options. Traveling Route 66 or visiting the Grand Canyon are evergreen classics. But these uniquely excellent drives were selected for weather, accessibility, and combination of natural wonders and modern conveniences. American Road Trips to Take In 2025What’s the best road trip to take for you? Only you can decide that, but it’ll depend on who you’re driving with (or if you’re flying solo!), where you’re starting your journey, and how long you want to spend in the day, per car and overall. Each of these road trips can be shortened or lengthened with fewer or more stops, and each has their pros and cons. And once you’ve picked one, check out our road trip planner.1. New England: Jamestown to Acadia National ParkIf you’re craving a seaside getaway, it doesn’t get much more iconic than a drive up the New England coastline. This is a great option for summer and fall road trips. During the summer, you get cooler temperatures than much of the US, sea breezes, lobster rolls, and beach days. 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Driving in winter conditions doesn’t make for a relaxing vacation!2. Smoky Mountains: Asheville to MemphisIf you’re interested in a road trip through classic Americana, a trip from North Carolina to Tennessee might be just the ticket. By stopping in Nashville and Memphis, you can see much of the heart of American music history, and the barbecue across the region is iconic. 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Useful Skills You Can Learn While Driving

Have you ever considered learning while you drive? Whether you want to make better use of a daily commute or are heading out on a long solo drive, if you want to learn a skill from behind the wheel, we have some ideas for you!The key to learning on the road is to choose something you can do with just audio media – and to make sure nothing you do is so engrossing that you lose focus. It’s important that you still drive safely, no matter what. Essentially, we recommend skills you can learn from an audiobook or podcast and repetitive activities that allow you to build up your knowledge or talents over time.Let’s take a look.Things You Can Learn While DrivingThe average American driver spends, according to a AAA survey, just over an hour in their car every single day. Why not find ways to be productive with all that time? Here are some things you can pick up while you drive.1. Learn a LanguageThis is probably the most popular skill to tackle in the car. Whether you’re brushing up on a language you learned in high school, preparing for a trip, trying to improve your chances at a new job, or learning just to stay sharp, there are tons of good reasons to learn a language while you drive. 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Avid birders in particular might find this interesting – and there are many resources for birders, since it’s such a popular hobby (BirdNote Daily is a good option) – but resources exist for frog fans and other animal lovers as well, dependent on your region. And there’s no reason you need to stick to your own backyard! Noisy by Nature is a kid-focused podcast that introduces the sounds of Australian wildlife (and is, frankly, fascinating for all ages).As an added bonus, nature sounds can also be relaxing, which is helpful when you’re stuck in traffic in a 20 minute slowdown.3. Write Better EmailsWhether you’re an English learner, a complete word nerd, or someone who struggled with writing in school and wants to up their email game, there are tons of great podcasts about English grammar, word usage, and how people speak. A few top recommendations include: Grammar GirlThe AllusionistVocal FriesYou’re Saying It WrongWebster's Word of the DayExpanding your vocabulary, mastering complex grammar rules, getting into the nitty-gritty of style, and discovering common malapropisms and mistakes can make you a better writer, reader, and conversationalist.4. Level Up Your Financial LiteracyThere are tons of great personal finance podcasts being made right now. 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AutoApprove can help you find the right deal for your unique situation – and do the paperwork for you.Get a free, no-commitment quote to see how much you could save.5. Practice Using Your VoiceWhether you’re a nervous public speaker or thinking about getting into amateur opera, the car is the perfect place to get vocal reps in. There are tons of voice teachers making content online – you could find a vocal warm-up to try while you drive, or look up exercises in advance and put them into practice when the car door is closed.Whether you rehearse a presentation or sales pitch, practice improvising speeches, or sing do-re-mi, the car is a rare place where you can let yourself be as noisy as you want, take advantage of it!6. Build Your Understanding of MathRegardless of your current level of math expertise, you can skill build while in the car. Some people work on basic skills like solving simple number problems, memorizing multiplication tables, or learning more of the digits of pi. 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But the thing that interests you most when you set out on the road is always the best option, whatever that may be – even if it’s something silly like the workings of ‘90s cars or learning to understand Morse code. Whatever you choose, expanding your worldview and learning something new is always a good choice!And Those Are Seven Useful Ways To Spend Your Driving TimeMost of us spend quite a bit of time behind the wheel, trying to make something of that time is an admirable pursuit! From language learning to amateur opera performance, there’s always something interesting to do to pass the time and challenge your mind.But refinancing your vehicle doesn’t take any time at all.You could be paying less monthly on your auto loan, putting more cash back in your pocket for the things that matter most. Find out how much you could save with just a few clicks and no commitment. Get your free quote now.

5 Things Every Car Owner Should Know

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How to Deep Clean Your Car YourselfWhile automatic car washes are handy and typically fairly affordable, deep cleaning and detailing your car can get expensive and time consuming. Knowing how to keep your car clean and how to handle stains and wear and tear on the inside and outside can improve your driving experience. After all, according to AAA, American drivers spent an average of 60.2 minutes behind the wheel every day as of 2022. Making that space clean and comfortable can help that hour of driving feel less stressful.Plus, deep cleaning your car yourself can save you money, and some people find it meditative!Speaking of saving money…Here’s one more thing every car owner should know how to do: lower their car payment quickly and hassle-free with Auto Approve!Get a free quote to see how much you could save.3. How to Read A Paper MapOnce a ubiquitous skill, knowing how to read a paper map is less and less common with the rise of GPS and digital map apps for the phone and in-car systems. However, it’s important that drivers of all ages master this skill and keep it sharp to be safe. You never know when you could lose service or battery power. Having a map in your glovebox and knowing how to read can help save headaches should you land in a tough spot. The last thing you want in the case of a breakdown is to add not knowing where you are to an already stressful situation.And reading a map isn’t all – all drivers should have on hand and know how to read their vehicle’s manual. You never want to be stranded somewhere trying to guess the meaning of an alert you’ve never seen before!While reading a map might not be absolutely essential when you’re staying close to home, it can come in handy if you want to plan a road trip – and even more so when you hit the road and venture into new areas further from home (and, depending on where you’re heading, further from robust network coverage!).4. How to Drive in Bad WeatherGiven shifting norms for how often we see major storms – and new types of storms hitting areas that once rarely saw, for example, snow storms or hurricanes – knowing how to drive, and when not to drive, in all kinds of weather is an absolute must.Driving in winter storms or heavy rain can mean different risks and challenges than, say, very strong winds or a heatwave. Prepare for all possibilities by brushing up on your driving skills and keeping an emergency kit in your truck.In general, when the weather is crazy and you’re on the road, slow down, leave extra space between you and the car in front of you, and remember that if you start to slide, the best thing to do is take your foot off the gas and gently steer the front of your car toward the direction you want it to go.5. How To Recognize Warning Signs from An Old CarLast but certainly not least, assuming you do everything right and your vehicle serves you well for over a decade, you’ll want to start keeping an eye out for signs of wear and tear that might mean a car is on its last legs. There’s a rule of thumb called the 30/60/90 rule in auto maintenance that suggests you should take your car in for servicing and preventative maintenance every 30,000 miles. This is true regardless of how long the vehicle’s been on the road and whether or not it’s showing any of the major old car warning signs. Preventative maintenance can help catch problems early and let you drive with confidence even after years with your vehicle. If everything’s looking good, you just need to keep an eye out for rusting, brake issues, bumping or bouncing, or a persistent check engine light. And One More Thing Every Car Owner Needs to Know…How to lower their car payment! Auto Approve can help you lower your vehicle payment in minutes.Most people are overpaying on their auto loanIf you got your vehicle from a dealership, there’s a good chance you’re overpaying on your auto loan, thanks to dealer markups on rates. Auto Approve can help you find out whether you’re eligible for a better rate and start paying less through refinancing. To get started, all you have to do is answer a few questions, no commitment required. Then, an Auto Approve associate can help you find the best deal for you. Once you choose your refinance, Auto Approve does the paperwork, making the process quick and easy!Get your free quote to see how much you could save today.
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