Five Steps to Getting Out of an Upside Down Car Loan

One of the most significant costs of buying and driving a new car is the depreciation on its value. New cars can lose as much as 45% of their original value in the first three years (MSN Auto), leaving many people owing much more than their car is worth. If you find yourself in this “upside down” position, chances are your options for selling are limited. But in tough economic times, freeing up a car payment is often just enough to balance a household budget, so don’t give up the idea. Here are five steps to selling that upside down car.

1. Check the Kelley Blue Book (KBB) value.
Kelley Blue Book offers a great online service for looking up your used car’s value, making allowances for mileage, vehicle options, and the overall condition of your vehicle. By objectively classifying your car’s condition (hint: few cars are “mint”) you can get a good idea how much your car is really worth.

2. Get your car detailed.
It’s always a little surprising to see how many people are trying to sell dirty cars. Dirty cars bring low offers. Spend the money to get your car cleaned up, inside and out. It will be well worth it.

3. Try to sell your car via a “private sale.”
You can almost always get more out of your used car by selling it to an individual as opposed to trying to trade it in at a dealership, or selling it to an auto wholesaler or reseller such as CarMax. Advertise the listing in your local credit union bulletin or newspaper, and put a “For Sale” sign in the window when your vehicle is parked.

4. Arrange financing for the difference before the deal.
In order to give the new buyer a clear title you will need to arrange financing for the difference before the deal is closed. If you only owe a couple thousand dollars difference between the loan balance and what your car will bring in the sale you may be able to borrow it. Start with the lender holding the current loan - after all, they are already exposed, financially to the difference. If they won’t deal with you talk to your local bank or credit union.

5. Seal the deal with a bill of sale.
On the day of the exchange draw up a bill of sale to serve as an agreement/receipt between you and the buyer. When you pay off the loan and receive a title you can sign it and forward to the buyer. Be sure to check with your state for the appropriate bill of sale and title transfer instructions.

Many new car owners make the mistake of buying more than they can afford. Thanks to depreciation, they often feel stuck in these bad deals for the duration of the loan. However, by following the steps above you can get out of an upside down car loan, pay off the difference, and move on with your life.