What can you do if your car loan is upside down?

Is your car or truck worth less than what you owe on it? People in your situation are "upside down" or "underwater." It's a predicament that could make it harder to buy your next vehicle.

Your car isn't just your transportation. To your lender, it's also the collateral you pledged in case you don't keep up with your payments. Because of that, the instant you sell it, your remaining loan balance is due.

Let's say you owe $14,000 on a car that's only worth $10,000. In that situation, you have $4,000 in "negative equity." If you sell, not only would you have to give the lender the $10,000 you received, you'd also have to come up with another $4,000.

There's another scenario in which being upside down could be even more painful: If you're in an accident and your vehicle is declared a total loss, the insurance will generally only cover the actual cash value.

While there's no quick fix, here are some ways to deal with this common problem.

Should you sell your car or trade it in?

As you assess your situation, it's important to research not only how much you'll get with a trade-in, but also what you could get in a person-to-person sale. You may find the higher price in a private sale would put you back above water — that is, if you're willing to sell the car yourself.

Making a private sale does have its disadvantages, such as increased effort to sell the vehicle, increased safety risks or delays in making a sale. With a trade-in, you can get an immediate sale, lower risks and lower effort. Many states also offer a tax break on a trade-in, deducting the trade-in value of the old car from the sales price of the new vehicle and saving you on taxes. Check the rules where you live.

Think about waiting for a while.

It may not be what you want to hear, but if you're upside down, the easiest strategy is to postpone any dreams of buying a car until you're right-side up on this one. If you're right-side up, do you really need that new car? You can wait for a while until it's the right time for you to buy.

Consider if refinancing your loan makes sense.

You may consider refinancing your current loan to get a lower interest rate which will reduce the total interest you pay on the loan. However, it may not be wise to refinance only to simply lower your monthly payment. If you refinance at the same rate but a longer loan term to lower your payment, you could find yourself upside down again.

Refinancing could be a wise option for you if:

1. You have all the details of your loan, like the loan balance, term or length of the loan, current interest rate and monthly loan payment amount.
2. You have a refinance option available to you that can reduce the total amount of interest you would pay. The total loan interest and costs of the refinanced loan should be less than your current loan.
3. You can afford the monthly payments of the new loan and you can avoid extending the time until your vehicle is paid off to less than 6 additional months.

Consider making extra payments.

To reduce your loan balance faster, you could also make extra payments of principal in addition to your regular monthly payments. Before doing this, make sure your loan doesn't have prepayment penalties, and that your lender doesn't calculate your balances using "precomputed interest." If so, there may be little or no benefit from making extra payments.

Before paying extra payments toward your auto loan, compare its interest rate to the rate you're paying on other debts. If you're comfortable hanging on to the car, you may get a better return on that extra cash by paying down higher-interest debt first. You also need to consider your other finances, such as maintaining an emergency fund and making sure your other bills get paid.

Take the rebate.

Some incentives for new car purchases come from manufacturer rebates. While many buyers put this money toward the price of the new car, you may be able to take it in cash instead and use it to pay off your old loan — if it's big enough. Be sure to research any incentive offer you consider.

Beware of the rollover loan.

Dealers and lenders may encourage you to roll over what you owe on your old car into a loan to buy your new one. That's not a move you should take lightly, since it will make your payments bigger and increase the chance that you'll find yourself upside down again.

Make the best decision for your situation.

Your car is one of the bigger purchases that you will make. Everyone's situation is unique. Being upside down doesn't have to be a game stopper. If your car is in good working condition and you don't need a new car right now, keep it and payoff your loan over time. In case of an accident or damage to your car, make sure to carry adequate auto insurance.

If you need to replace your underwater car, make sure that you are making the best decision for your needs and financial picture. Sometimes you need to phone a friend or a family member to help you navigate the pros and cons. Use the tips in this guide and let us know how we can help.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank and/or USAA Savings Bank do not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.