How Do I Buy A Car When I'm Upside Down On My Current Loan?

I desperately need a new car, the one that I have is becoming an unreliable money pit. The problem is I owe $4000 more than it is worth. I have no cash for a down-payment, but I can handle $350 per month. How do I get into another vehicle and break the cycle of being underwater on a car loan?

Once you are underwater (owe more than the vehicle is worth) it is a difficult hole to get out of. But if your current car is costing you too much in repairs and it is time to move on, all is not lost. Here are three ways you can get yourself another vehicle and begin to move out of the underwater loan cycle.

(Note: none of the following calculations include your local sales tax, title and tag fees as these vary depending on your location. Know what your tax rate is and go your local DMV website to see what your average registration fees are. Then adjust your budget accordingly)

As we covered in our great Car Buying finance debate, the problem with new cars is depreciation. If you are already upside-down on this loan, you don't want to buy a car that is going to take a big hit as soon as you drive off the lot. Pre-owned cars have already suffered that depreciation and while they will continue to lose value they will do so at a much slower rate.

With $350 per month at your disposal, that gives you about a $19,000 budget if you can get a 60 month loan at 3.5 percent. There are tons of great cars for $19 grand, but not so fast...you still have that $4,000 deficit to manage. That really gives you a max budget of $15,000.

Even at $15,000 there are plenty of quality pre-owned or even certified pre-owned cars to choose from. While you can get some pretty bonkers cars for the price of a cheap compact, I'm going to suggest you go with a vehicle that has a solid history of reliability and low maintenance costs, something along the lines of a Civic or Corolla. The Hyundai Elantra and Kia Forte are also nice choices because you get the benefit of those long warranties.

Now here is the major obstacle you may encounter with purchasing a used car and rolling in $4,000 on top of it, most banks will not want to finance a pre-owned vehicle for significantly more than it is worth. The reason being if they do have to repossess that car and resell it, the market value of that vehicle isn't going to make up for the extra $4,000. This is a high risk scenario for a bank. That's not to say no bank will give you a loan, but it will be a challenge and you may have to wade in the muck of those "Buy Here Pay Here," dealers.

New car dealers have a little more flexibility in getting loans approved above what the sale price of the car is. Of course this is how people end up with underwater loans to begin with. However, if you are smart and disciplined about this you can break free of the cycle. There aren't a ton of new cars for $15 grand, especially once you add the destination fee and an automatic transmission ( I realize that this is Jalopnik and manuals are better, but the vast majority of buyers want automatics). Within this price category there are really 3 choices that fall under $15k with an auto-trans, the Chevy Spark, Nissan Versa, and Versa Note. These are all small cars that are ideal for city use, but may not provide enough practicality if you have to move multiple passengers. Therefore, if you need a more expensive car that offers more space, be open to an alternative to purchasing.

The hardest thing about being upside-down is that deficit has to be rolled into a new loan. So if a car costs $19,000 and you are $4,000 underwater, you have to finance $23,000. You run the risk of continually making payments on a car that is worth less than you owe. The two main benefits of leasing especially with this scenario is you can get a newer/more expensive car for your money and you turn the car in at the end of the term and essentially start fresh. Of course that deficit still has to be rolled into the lease making your payments higher, that it would without it but your payments probably still be lower if you were to purchase new.

For example Hyundai is offering a 36 month, 12k miles per year lease on an Elantra with an MSRP of $19,060 for $179/mo with $2,299 down. You don't have that $2,299 and you have $4,000 that needs to be factored in. Therefore we have to add $6,299 to that $19,060 for a total of $25,359. If we divide that extra $6,299 over 36 months we have $174/mo add that to the $179 and you are leasing your Elantra for $353/mo. Now that sucks, but it's how the math works out.

Now compare that to a purchase. There is no minimal down-payment required on a purchase so it is just the $19,060 plus $4,000 for a total of $23,060. Let's say you — despite your underwater loan — have excellent credit and you can get the 0 percent financing for 60 months. Your payment would be $384/mo, probably worth the extra $30 per month provided your budget can manage it. Chances are you don't have excellent credit and therefore don't qualify for the 0 percent financing. If you managed to finance that $23,060 at 3.5 percent, your payment would be $419.05/mo. Well above your budget of $350.

Of course that lease offer of $179 is contingent upon excellent credit, that you may not have, and therefore with a higher interest rate (money factor) your lease may be closer to $375/mo. But with some smart shopping you may be able to reduce the price of that car and get it within budget.

If you have a question, a tip, or something you would like to to share about car-buying, drop me a line at AutomatchConsulting@gmail.com and be sure to include your Kinja handle.

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