How to Get Out of an Upside Down Car Loan

If you’re currently upside-down on your auto loan, which means you owe more money on your car than it is worth, not too many dealers nowadays will allow you to roll the amount you owe into a new car loan.

Then you’re stuck with a vehicle and auto loan payment you either can’t afford or don’t want any more.

One solution to being upside-down on your current auto loan is to use a cash rebate being offered by the manufacturer to pay off your trade-in vehicle. Instead of putting the cash rebate directly toward the new vehicle, buyers can use it toward paying off the loan on their trade-in car.

“The manufacturer offers rebates to cover people who are upside-down,” says George O’Sullivan, e-commerce director at Thoroughbred Ford in Kansas City, Mo.

upside down car

Upside down on your auto loan? Try using a cash rebate to pay your car loan off to help you get a new car.

Here’s how it works. Say someone is $4,000 upside-down on their current auto loan, meaning the difference between the balance they owe on the car and what the car is currently worth is $4,000. The customer wants to buy a used car for $20,000. There wouldn’t be any cash rebates on that car because it’s used.

So the dealer would add the $4,000 from the upside-down trade-in vehicle to the $20,000 used car and the amount financed would be $24,000.

“This would be a 120% carry,” O’Sullivan explains. “The bank has to agree to loan you 120% of the value of the vehicle just for you to get qualified.”

Here’s the scenario if the customer wanted to get a new car. Let’s say the new car has an MSRP of $22,000 and an invoice price of $20,000. This model has a $4,000 cash rebate. The customer has the same trade-in vehicle that is currently upside-down by $4,000.

“This would be a 100% carry,” O’Sullivan says. “The rebate would cover the amount that the customer is upside-down on the trade.”

If the customer has no trade-in car and wanted to buy the same new car at $20,000, he or she would pay $16,000 because of the $4,000 rebate.

 “Cash rebates are especially helpful when the model year is over and the dealer is trying to get rid of old inventory,” O’Sullivan says. “When the new car comes out, the new model will have less incentives and the old model will have the bigger rebate.”

O’Sullivan says the rumor that you can’t trade-in a car you still owe money on or are upside-down on is not true.

“Dealerships will always let you trade-in a car you owe money on if they can find a bank to do the deal,” he says. “If buyers are upside-down, it depends on how far upside-down they are. It’s easier to get approved for a car loan if they are upside down only $1,000 or $2,000 versus being upside down $5,000 to $10,000.”

If a consumer is stuck with a car loan that is really under-water, they do have some options.

“If the buyer is upside-down that much, they should have more cash to put down and look for the really big rebates. To get the bank to carry over the balance on the old auto loan, it also depends on their credit score. If they have an 800+ score, nobody cares and they can still get approved. The more you try to carry over, the higher the interest rate will be.”

So if you’re currently upside-down on your car loan and want to use it as a trade-in on a new or used car purchase, you do have some options. Shop around, see where your credit is at and look for the big rebates. A big rebate can be used to cover your upside-down auto loan, so you may find that a new car with a big rebate will be a better deal for you than buying a used car with no cash rebate.