3 Ways to Avoid Going Underwater on Your Auto Loan

fish swimming around car underwater auto loan

It can be uncomfortable knowing that you owe more on a car than it's worth, which is why it's called being "underwater" on a loan. Sometimes being underwater is an impossible situation to avoid, but there are strategies you can use to get your car — and your finances — back on dry land, so to speak.

How can you tell if you're underwater on your auto loan? Look up the year, make, and model of your vehicle at a website like Kelly Blue Book or NADAGuides to get its current value, then look up the payoff amount on your loan. If your car's value is less than the amount you owe, you're considered "underwater" on your loan. If your car is worth more than you owe, you're considered "above water" on the loan.

Want an easier way to figure out where you stand with your loan? We have a calculator for that!

If you're afraid of getting into deep water with your auto loan, here are three ways to shorten or even eliminate the experience:

  1. If you can't swing a bigger down-payment or afford a shorter term agreement on your loan, consider Guaranteed Auto Protection (GAP) insurance coverage. What this insurance will do is cover the deficiency on your loan if your vehicle is totaled in an accident or stolen, meaning you never have to worry if you're underwater on your loan. Auto dealers charge upwards of $800 for this kind of insurance coverage, but if you get your loan through Hanscom FCU, our GAP Advantage Plan is only $399 (a cost you can include in your loan) and it offers a few other perks, like covering the cost of your deductible on your auto policy up to $500 for all the cars you own, for as many claims you make over three years. You will also receive an additional credit of $1,000 you can apply toward the financing of a new vehicle, providing you finance with Hanscom FCU within 90 days of the total loss. Read more about our GAP Advantage Plan here.
  2. Put 20% (or more) down on your auto purchase. Putting nothing or only a little down on an auto purchase can be attractive, especially if you're a little short on cash. Chances are good you'll get through the first three or four years of car ownership where being underwater on your loan won't hurt you. However, problems can arise if you're in an accident where your car is totaled or is stolen and not recovered. At that point, you're going to find yourself owing the difference between your auto's value and the remaining balance on your loan, which can be substantial. When you put down 20% (or more), you're covering taxes and all the fees a dealer passes on to you, as well as the average 11% depreciation rate when you drive your new car off the lot. That 20% down will keep you above water during the full term of your loan.
  3. Get an auto loan with a term that's 48 months or less. Because loans with terms of 60, 72, or 84 months take longer to pay off, you're going to be underwater for longer amount of time with them. Shorter loan terms truncate your underwater life.

Driving your new car off the lot is a fun, exciting time and we know the last thing you want to think about is having your new wheels totaled in an accident or stolen. But if it happens, knowing that you've done all you can to keep yourself in a good financial position will take the sting out of a stressful situation.

Learn more about  Hanscom FCU GAP Insurance

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About Author

Diana Burrell
Diana Burrell

Diana Burrell is the communications manager at Hanscom FCU and edits the MoneyWisdom blog. She has a background in magazine journalism, as well as marketing, advertising, and public relations, and has written over a dozen books. You can reach her at dburrell@hfcu.org.

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