If you’re facing negative equity on your car, you’re not alone. Negative equity, also known as an upside-down car loan, occurs when you owe more on your car loan than the car is worth. This can happen for a variety of reasons, such as depreciation, high interest rates or a long loan term. Whatever the cause, negative equity can be a frustrating and stressful situation to deal with.
The effects of negative equity can be significant. Not only does it mean you owe more on your car than it’s worth, but it can also make it difficult to sell or trade in your car. Additionally, if you’re involved in an accident and your car is totaled, your insurance may not cover the full amount you owe on the loan. But don’t worry, there are options available to help you get out of negative equity and back on track with your finances.
Key Takeaways
- Negative equity occurs when you owe more on your car loan than the car is worth.
- It can make it difficult to sell or trade in your car and can have significant financial consequences.
- Options to handle negative equity include delaying the trade-in, paying off the negative equity, or rolling the negative equity into a new car loan.
How Negative Equity Happens
Negative equity occurs when you owe more money on your car than the car is worth.
When you take out a loan to buy a car, you are typically required to make monthly payments that include both principal and interest. The principal is the amount of the loan that you borrowed, while the interest is the cost of borrowing the money. Over time, as you make payments, the amount of principal you owe decreases and the amount of interest you pay decreases as well.
However, cars depreciate in value over time. This means that your car is worth less than what you paid for it. As a result, if you owe more on your car than it is worth, you have negative equity. The average car will depreciate by around 10-15% per year and many will lose about 50% of their value by the time they are 5 years or older.
Another way that negative equity can occur is through financing. If you finance your car through a dealership or other lender, you may be required to pay a higher interest rate than if you had purchased the car outright. This can increase the total amount of money you owe on the car, which can lead to negative equity.
Finally, negative equity can occur when you buy a new car loan. When you trade in your old car for a new one, the dealership may offer to roll the remaining balance of your old car loan into your new car loan. This can increase the total amount of money you owe on your new car, which can lead to negative equity.
Effects of Negative Equity
Negative equity is rather normal in this day and age, however, its important to realize that having this kind of debt can impact your finances in the long-term.
Credit Score
Negative equity can have a negative impact on your credit score. Late or missed payments due to financial stress can lead to a drop in credit score. This can make it more difficult to obtain financing in the future, and may lead to higher interest rates.
Debt
When you have negative equity, you are effectively in debt for more than the car is worth. This can make it difficult to sell or trade in the car, as you will need to pay off the remaining balance before you can do so. If you are unable to pay off the remaining balance, you may end up defaulting on the loan, which can have serious consequences for your credit score and financial situation.
Upside-Down Car Loan
Negative equity is also known as an upside-down car loan. This means that you owe more on the car than it is worth. This can make it difficult to sell or trade in the car, as you will need to pay off the remaining balance before you can do so.
Bigger Loan
If you decide to trade in your car with negative equity, you may end up with a bigger loan than you had before. This is because the remaining balance on your old loan will be rolled over into your new loan. This can make it more difficult to pay off the loan, and may lead to higher interest rates.
Assessing Your Car’s Value
Before you can determine the best way to get rid of negative equity on your car, you need to know how much your car is worth. There are a few ways to assess your car’s value, including using Kelley Blue Book, Edmunds, or other online resources.
Kelley Blue Book is a popular resource for car valuations. You can visit their website and enter your car’s make, model, year, and mileage to get an estimated value. Keep in mind that this is just an estimate and your car’s actual value may be different based on its condition, location, and other factors.
Edmunds is another resource you can use to research your car’s value. They offer a free online tool that allows you to enter your car’s information and get an estimated value. Like Kelley Blue Book, this is just an estimate and your car’s actual value may be different.
In addition to using online resources, you can also research your car’s value by checking local listings for similar cars and seeing what they are selling for. This can give you a better idea of what your car is worth in your local market.
Once you have an estimated value for your car, you can use a calculator to determine how much negative equity you have. To do this, subtract the estimated value of your car from the amount you still owe on your car loan. The difference is your negative equity.
Assessing your car’s value is an important first step in getting rid of negative equity. By knowing how much your car is worth, you can make informed decisions about how to proceed.
Options to Handle Negative Equity
If you find yourself with negative equity on your car, there are a few options available to you. Here are some ways to handle negative equity:
1. Sell or Trade-In Your Car: If you need to get rid of your car, you can sell it or trade it in. However, if you have negative equity, you’ll need to pay the difference between the car’s value and what you owe on the loan. If you can’t afford to pay off the negative equity, you may need to consider other options.
2. Refinance Your Car Loan: If you have good credit, you may be able to refinance your car loan to get a lower interest rate and lower your monthly payment. However, if you have negative equity, you may need to pay off the difference between the car’s value and what you owe on the loan before you can refinance.
3. Private Sale: If you have negative equity, selling your car privately may be a good option. You may be able to get a higher price for your car than you would if you traded it in at a dealership. However, you’ll need to pay off the negative equity before you can transfer ownership to the new owner.
4. Roll Over Negative Equity Into a New Loan: If you’re buying a new car, you may be able to roll over the negative equity from your old car loan into your new loan. However, this will increase the amount you owe on your new car loan, and you’ll be paying interest on the negative equity.
5. Work with Your Lender or Dealer: If you’re struggling to make your car payments, you may be able to work with your lender or dealer to find a solution. Your lender may be willing to extend your loan term or lower your interest rate to help you make your payments. Your dealer may be willing to buy back your car or help you find a new car that fits your budget.
Remember, each option has its own pros and cons. Make sure you do your research and consider all of your options before making a decision.
Steps to Get Out of Negative Equity
If you find yourself in a situation where you owe more on your car than it’s worth, it can be frustrating and stressful. However, there are steps you can take to get out of negative equity and get back on track financially. Here are some options to consider:
1. Make Extra Payments
One way to reduce your negative equity is to make extra payments towards your car loan. By making additional payments, you can reduce the principal balance of your loan faster, which can help you get out of negative equity sooner. Before making extra payments, make sure there are no prepayment penalties on your loan.
2. Increase Your Down Payment
Another way to reduce your negative equity is to increase your down payment when purchasing a new car. By putting more money down upfront, you can reduce the amount you need to finance, which can help you avoid negative equity in the future.
3. Consider a Shorter Loan Term
If you’re purchasing a new car, consider a shorter loan term. A shorter loan term means you’ll pay less interest over the life of the loan, which can help you get out of negative equity faster. However, keep in mind that a shorter loan term means higher monthly payments.
4. Delay Your Purchase
If possible, consider delaying your purchase until you’re no longer in negative equity. This can give you time to pay down your loan and reduce your negative equity. It may also give you time to save up for a larger down payment.
5. Sell Your Car Privately
If you’re unable to get out of negative equity through any of the above options, consider selling your car privately. While this may take more time and effort, you may be able to sell your car for more than the trade-in value, which can help you pay off your loan and get out of negative equity.
6. Create a Budget
Creating a budget can help you better manage your finances and reduce your negative equity. By tracking your expenses and income, you can identify areas where you can cut back and put more money towards your car loan. This can help you get out of negative equity faster.
7. Avoid Cash Advances
Avoid taking out cash advances or using credit cards to pay off your car loan. This can lead to even more debt and make it harder to get out of negative equity. Instead, focus on making extra payments and reducing your expenses to pay off your car loan faster.
Preventing Future Negative Equity
If you want to avoid negative equity in the future, there are a few things you can do. Here are some tips:
1. Choose a Shorter Loan Term
One way to avoid negative equity is to choose a shorter loan term. When you take out a longer loan, you’ll have smaller monthly payments, but you’ll also pay more in interest over the life of the loan. By choosing a shorter loan term, you’ll pay less in interest and build equity in your car faster.
2. Make a Larger Down Payment
Another way to avoid negative equity is to make a larger down payment. When you make a larger down payment, you’ll borrow less money, which means you’ll have less to pay back over time. This will help you build equity in your car faster and reduce the risk of negative equity.
3. Buy a Used Car
If you’re worried about negative equity, consider buying a used car instead of a new one. Used cars are generally less expensive than new cars, which means you’ll have a smaller loan amount. This will help you build equity in your car faster and reduce the risk of negative equity.
4. Consider Your Options When Trading In Your Car
If you need to trade in your car, consider your options carefully. Rolling over negative equity into a new auto loan can be tempting, but it can also be risky. You may end up owing more on your new car than it’s worth, which will put you in a negative equity position again.
Instead, consider waiting to trade in your car until you’ve built up more equity, or consider selling your car privately. You may be able to get a better price for your car by selling it yourself, which can help you avoid negative equity.
5. Keep an Eye on Interest Rates
Interest rates can have a big impact on your car loan. When interest rates are high, your monthly payments will be higher, which can make it harder to build equity in your car. When interest rates are low, your monthly payments will be lower, which can help you build equity in your car faster.
Keep an eye on interest rates and consider refinancing your car loan if rates drop significantly. Refinancing can help you lower your monthly payments and reduce the risk of negative equity.
By following these tips, you can reduce the risk of negative equity and build equity in your car faster.
Frequently Asked Questions
Can I trade in a car with negative equity?
Yes, you can trade in a car with negative equity. However, it’s important to carefully consider your options, as some routes could cost you more than others. For instance, you could continue to pay off your loan to get positive equity in your car or roll over your negative equity into a new auto loan. Keep in mind that rolling over negative equity into a new loan could result in higher monthly payments and a longer loan term.
How much negative equity can be rolled into a new car loan?
The amount of negative equity that can be rolled into a new car loan depends on the lender and your credit score. Generally, lenders allow you to roll over up to 125% of your car’s value into a new loan. However, this could result in higher monthly payments and a longer loan term. It’s important to carefully consider your options before rolling over negative equity into a new loan.
Is it wise to roll negative equity into a lease?
Rolling over negative equity into a lease could be an option, but it’s important to carefully consider the terms of the lease. Keep in mind that you’ll be responsible for making monthly lease payments, and the lease term will typically be shorter than a traditional auto loan. Additionally, you’ll need to pay any fees associated with the lease, such as a security deposit or acquisition fee.
How can I get out of a car with negative equity?
There are several ways to get out of a car with negative equity. You could continue to pay off your loan to get positive equity in your car, sell your car and use the proceeds to pay off your loan, or refinance your loan to get a lower interest rate and lower monthly payments. Keep in mind that some of these options could result in a loss of money or additional fees.
Are there dealerships that pay off negative equity?
Some dealerships may offer to pay off your negative equity as part of a trade-in deal. However, it’s important to carefully consider the terms of the deal, as you could end up paying more in the long run. Be sure to read the fine print and ask questions before agreeing to any trade-in deal.
Can a bank finance a car with negative equity?
Yes, a bank can finance a car with negative equity. However, keep in mind that you may be required to pay a higher interest rate and make higher monthly payments. Additionally, you’ll need to have a good credit score to qualify for financing with negative equity.