Getting Out of an Upside Down Car Loan

Automobiles represent one of the largest expenditures in our household budgets, second only to housing. The costs of driving a car don’t stop with the monthly payments, but include insurance premiums, gasoline, tires, general maintenance and costly repairs. One of the most significant, forgotten costs of buying a new car is the depreciation expense.

Cars go down in value like a rock (where do you think Chevy got the tagline?). New cars can lose as much as 30-40% of their original value in the first two years, leaving many people owing more than their car is worth (a position often referred to as being in an upside down car loan). If you find yourself in this upside down status chances are your situation could be greatly improved if you sell that “new” car and buy a $2,000-$3,000 used car to get back and forth to work.

3 Things to Remember When Getting Out of an Upside Down Car

1. The first step in selling an upside down car is to get a good valuation figure to work with. Kelley Blue Book ( offers a great online service for looking up your used car’s value, taking into account mileage, options specific to your model, and the overall condition of your vehicle. Be honest with yourself when assessing the condition of your car. If your kid spilled grape juice all over the backseat upholstery don’t list the condition as excellent. You get the idea.

2. Always look for the “private sale” estimate. You can almost always get more out of your used car selling it to an individual than trading it in at a dealership, or selling it to an auto wholesaler/reseller such as CarMax. Advertise in your local credit union bulletin or newspaper, and stick a For Sale sign in your window when the vehicle is parked.

3. If you find yourself in the unfortunate position of being in an upside down car loan, consider financing the difference. This is one of the only times you will here me advocate taking on new debt when trying to become debt free. If your car is worth $15,000 and you owe $18,000, it’s much better to sell it and owe $3,000.

Yes, you still have a debt associated with a car without having the car, but better to owe $3,000 than $18,000. With decent credit you should be able to finance this difference at places like a local credit union, or online via Lending Club. If you don’t have any cash sitting around for another car, you may want to add $1,500-$2,000 to this figure to include your new (used) car.

Bottom line, quit sacrificing your financial future for the opportunity to impress people at a stop light. Seriously folks, a car is four tires and a hunk of metal. They were designed to transport us from one location to another. Despite popular opinion, they don’t make us look any better or make our lives any richer. Remember, Sam Walton, one of the richest men in America at the time of his death, still drove his 1979 pickup truck.


  1. Great tips Frugal Dad. Another great place to look for valuation is NADA. A lot of banks use this one.

    Something that you can learn from these valuation reports is how quickly some cars depreciate in relation to others. The all go down, just some do it “like a rock” others like a rock tied to a few balloons!

    I remember my mother buying a new car (Pontiac) back in 1982. She drove it for a few days and didn’t like it so she wanted to trade it for another. In just a matter of days, it lost over $4,000 of its value. Result: she drove it a while longer, quite a while longer.

    Maybe we need to take your advice and remember that a car is just a tool for transportation and not a fashion statement or a self esteem booster. After a month or so, the “new” wears off, the dash gets dusty, the floor mats have dirt in them, and it’s just another car . . . but with a huge debt burden.

  2. I think the best advice on selling a car that you’re upside down on, is simply this – Don’t. Keep the car till you’re right side up ( paying extra on it every month to speed it up ) . Suck it up and take your blows, and vow not to repeat.

  3. Using the Kelly Blue Book is great advice. We used these estimates when purchasing our used cars to figure out how much the car was worth that we were trading in and how much the cars were worth that we were looking at.

    We are sticking to our old beat up junkers for now 🙂 It is helping us to pay down our other debts faster and I am grateful to not have to worry about how to make payments. I can’t believe how much people pay for their rides 🙂

  4. Hmmmm…I would like to add just one more thought on this post, as it’s a fairly common theme on these frugal living sites.

    Usually buying a used car IS a good idea, but as the daughter of a mechanic, I can tell you that most people are woefully ignorant of even the basics of maintenance and upkeep that older cars require.

    Older cars just plain need $$$ to keep them running. Not a lot, but it can seem like a lot when you need a new transmisison and the shop is charging you $2500 to replace it…and you only paid $4000 for the car.

    If you are handy, grew up around cars or know how to rebuild an engine, then an older car is a good fit and can be VERY cheap to own. If you’re not, or you depend on that car to get you to work, and you don’t have the cash cushion to fix any major repairs, I would urge you to go with a newer car (still not brand new!) and perhaps look into an extended warranty.

    That and be nice to your mechanic. Loyalty and decent conversation go a long ways towards saving you money with shop expenses 🙂

  5. Shan-Oh – I agree on the not buying used cars part. I couldn’t fix a car if my life depended on it, and i certainly don’t want the added risk of breakdowns. My job doesn’t tolerate late days / missed time from work, and these are things that are a reality with used cars.

    But when you buy a new car, research and cash down are your friends. Trading in cars with in equity is not the answer, and will only further your troubles.

  6. What Frugal Dad says may have some merit, but I think he forgot one minor detail in his advice giving. When you take out a car loan to buy a car, who gets the title? You?–No. The bank who offered the loan does. And, in order to sell your car to someone else you will eventually need to obtain that title from that bank. So, I’m not sure how one would even try to sell a car that they don’t have the title for if they are selling it for less than they owe on it unless they have the means to pay any remaining difference once they got an offer from a buyer.

  7. Adam,

    Frugal dad is saying you go to your local credit union and take out an unsecured personal loan for the difference in the selling price of the car and what you owe on it. Then you go to your financing company with the enough money to get the get the title, which you can then turn over to the new owner.

    i havent actually tried this method for getting a car unloaded, but i’ve been giving it some thought for a few months now. I need to know it works for sure before i do anything.

    the other end of it is that you need to find a reliable car for as freakin cheap as you can, something that won’t require much work, that if the tranny does crap the bed doesnt require you import your parts from Uzbekistan, and is mechanically simple enough that practically any backyard mechanic can fix.

    it sounds kinda risky, and i think it is, but if something does go wrong with the car (which probably will happen) hopefully the repair costs are less than the amount you were upside down in the first place.

  8. Please help! We are upside down in a Blazer to the tune of $10K minimum. We can’t just sell it and finance the difference. We have 4 kids in carseats, so I literally MUST drive a big car. The reason we have our stupidly expensive Chevy is because our beater van DIED on the freeway and stranded me and my 4 kids. Not cool, and yes, we got screwed at the dealership because we were panicked. So we can’t sell it, eat the $10K and buy a $2K beater car because that is the car the kids ride in. HELP ME! Our $490 payment is KILLING US.

  9. Rachel, did you ever work something out for your situation? I am in a very similar situation I need to get something done fairly quickly. I am approx $10k upside down in my Tuscon. I have a rare bone disease and need a vehicle that sits up higher (like a truck) so financing a cheap used car is not really an option for me. I am now one month behind on my payments and afraid they will repo any day now. Please help, I am open to any advise out there.

  10. Unfortunately, we have no easy fix. We’ve been paying the $500 a month payments and now we are upside down about $6K. Our plan is to use our tax return and a small personal loan to pay off the difference, sell the Blazer, and buy a $5K Dodge Grand Caravan (we can get a 2005 or older, probably). That way we get safety and better gas mileage, and we will save about $400 a month in car payments.

    So, there’s no easy fix. 🙁 We’re having to eat the $5K, but we’ll save $400 a month for the next 4 years, so we’re still coming out better. Good luck with your car, this has been an impossible situation for us and like I said, we’re having to just bite the bullet and take the hit to get out of it.

  11. There needs to be legislation set up to stop these crooked dealers from financing a car for more than it’s worth. I purchased a 2007 Hyandai for $24K (the biggest mistake of my life). A month after I bought it, I had some idiot blow a redlight and t-bone me. The car was repaired but, when I tried to trade it in last month, I was told that It’s worth NOTHING because of the accident. I owe $12,000 for a car that’s worth nothing. Any suggestions?

  12. Jim, before you settle with the insurance company from the accident, look into what they owe you for depreciation of value due to the repairs. I don’t know a lot about it, but if you have someone you can go to for legal advice, they should be able to help you out. I believe you can pursue that up to two years after the accident.

  13. dont sign @auti loan 4 kids or anyone now we r in a spot van sits on deck loan was buoght out dont even know who has it daughter is driving a van she got @ AS COSIGNERS WE CANT DO ANYTHING WITH VAN SO IT SITS ON PATIO WITCH I CANT US HAS PUT STRESS ON FAMILY & I GET MAD EVERY TIME I WALK OUT MY DOOR & SEE VAN ON PATIO THIS SITE DIDNT REALLY HELKP ME NEED HELP FIGURING OUT WHOS GOT LOAN WHATS OWED &WHAT WE CAN DO WITH THE PROBLEM VAN I NEED HELP