Car owners can reduce the amount of negative equity on their cars by paying off their auto loan, fixing any existing damage to their cars, or installing vehicle improvements/upgrades.
How much negative equity is in your car depends on a few different factors, such as:
- How much your vehicle is currently worth in Kelley Blue Book
- What kinds of add-ons you have that may increase the estimated value of your car
- How much you currently owe to pay off your vehicle
- How many car loans you have
Here, you will learn more about equity, upside-down loans, and how to get rid of a car with negative equity!
What Is Equity?
Equity refers to the value of a piece of property, like land or a vehicle. A person may own something with positive equity if the market value is currently worth more than what the owner paid. Alternatively, a person may also own something with negative equity if the market value is currently worth less than what the owner paid.
You can calculate negative equity in your car by comparing the price of the vehicle with how much you currently owe on your auto loan. For example, if your vehicle is worth $25,000, but your auto loan is $35,000, the negative equity in your vehicle is approximately $10,000.
What Is an Upside-down Car Loan?
Upside-down loans are simply an alternative term for negative equity loans. If you have an upside-down loan, that means you owe more money than whatever the initial loan was used to purchase. According to news outlet CNBC, American auto loan debt has reached an all-time high of $1.5 trillion dollars!1
How Can You End Up With Negative Equity on a Car?
You can end up with negative equity on a car because of:
- Getting a bad loan deal
- Initial costs that cause a sudden spike in your car loan balance
- A payback schedule that is too long
- Getting talked into custom add-ons you don’t really want
- Inconvenient interest rates
Not Getting the Best Deal
Jumping into a car loan contract without shopping around or doing research first may leave you with an expensive car or an unmanageable payback schedule. If your car debt accumulates quicker than you can pay off your loan, you may find yourself with an upside-down car loan.
To ensure you get the best car loan deal, shop around at several dealerships before committing to any one place or vehicle. That way, you can get a good idea of what is available in your area for your personal financial situation.
Deceptive No Money-down Car Loans
Purchasing a car with no money down may seem like a fantastic deal. You get to drive away with a new-to-you vehicle without paying a dollar! However, these payments can creep up on you later and make your car loan seem incredibly daunting. Also, if your car depreciates in value significantly, you may end up with a negative equity loan from the start!
Long-term Payback Schedule
Long-term car loans often end up being negative equity loans. The longer it takes to pay off your loan, the more likely you are to acquire negative equity.
Unnecessary Add-ons
Add-ons like a sunroof, upgraded stereo system, and more can tack hundreds or thousands of dollars onto your auto loan. Walk into your car purchase knowing what you want, so you don’t let a slick salesman talk you into add-ons you don’t want.
High-interest Rates
Interest is one of the most pivotal aspects of a loan. Your car loan’s interest rate can dictate how long it takes to pay off your loan and how much you end up paying overall. Excessively high interest rates can cause a regular auto loan to become a negative equity loan in just a few years.
Other loans that can come with extremely high-interest rates are:
- Many credit union loans
- No credit check loans, such as payday loans
- Some bank loans
What Is Voluntary Surrender?
Voluntary surrender is a last resort option involving a car owner opting to give up their vehicle to their lender because they cannot pay back their car loan. While voluntary surrender is a better option than having your vehicle repossessed, it may, unfortunately, have a detrimental effect on your credit score. Voluntary surrender will significantly affect your credit scores for years and may hinder your ability to find approval for car loans in the future. It may also be particularly difficult to buy a new car with bad credit in the same circumstances.
Is It Possible To Get Rid of Negative Equity on a Car?
Yes! There are a few ways to get rid of a car with negative equity.
Receive Assistance From a Mechanic or Body Shop
If your car has negative equity due to simple mechanic or cosmetic issues, see if you can fix those problems. To save money on labor, you may ask a friend or family member who knows about cars to help you out with the work you need to do. There are also informative videos online that you can take advantage of to learn how to do simple car maintenance on your own.
Sell Your Vehicle
Trading in your car is another way to get rid of a vehicle with negative equity. You may trade in your car with the dealership you originally purchased the vehicle from if they buy used cars. Keep in mind that you may not get much money, if any, from the dealership if your car has a significant amount of negative equity.
Also, you may not sell your vehicle privately if you are still paying it off. If you want to sell a car you owe money on, you must find a buyer willing to cover the cost of what you still owe.
How To Get Out of a Negative Equity Car Loan
The only way to get out of a negative equity car loan is to pay off the original lender. However, this process doesn’t have to be as difficult as it may seem.
Refinance Your Auto Loan
Perhaps the fastest way to get out of a negative equity car loan would be to refinance with a new loan. When you refinance auto loans, a lender will take your existing car loan and refinance it into a brand new car loan. You may choose to refinance your old loan with the same lender or do some research and find a new lender.
By refinancing and getting a new car loan, you may enjoy perks like:
- Lower interest rate
- More manageable payback terms
- Possible debt consolidation with other loans or expenses
Continue Making Payments
To avoid account delinquency, staying on top of your car loan payments is vital. Even if your current loan is a negative equity car loan, you are much better off making regular monthly payments than you would be ignoring the loan while you search for a better deal.
To make things easier, you may opt for autopay. That way, you can rest assured knowing that you will never have a late or missed payment. Just make sure there are sufficient funds in your checking account!
Make Extra Payments When You Can
Pay off your car faster by making extra or additional payments when you can. When you pay extra on your monthly payment regularly, you will reduce the interest charges and costs you will have to pay over the life of your car loan.
In addition to, or as an alternative to paying extra, you can make additional installments on your loan in between payments. By making extra payments, you can reduce the amount of time it will take to pay off your loan by months or even years!
Tips for Avoiding a Negative Equity or Upside-down Car Loan
Set yourself up for success and avoid accruing negative equity on your vehicle from the start. Check out some helpful tips below that may help you avoid getting stuck with a negative equity car loan.
Pay Taxes and Fees Upfront
Instead of putting them off, pay any taxes or fees associated with your auto loan right away. Paying off those fees in one fell swoop at the beginning of your loan term means you don’t have to worry about them later. Paying fees and taxes early may even help you save on interest charges down the road.
| Car Loan Fees | Description |
| Dealership Fees | Fees associated with the purchase from a dealership. This may include administrative fees, documentation fees, or other charges related to the sale. |
| Origination Fees | Fees charged by the lender for processing the loan application. This covers the cost of initiating the loan. |
| Certain Taxes | Specific taxes related to the purchase of the car. This can include sales tax or other taxes applicable to the transaction. |
Make a Down Payment of at Least 20% Of the Vehicle’s Worth
Cars lose approximately 20% of their value as soon as you drive away from the car lot.2 To avoid being hurt by this immediate depreciation, try to make a down payment of at least 20% of your car’s Kelley Blue Book price.
If you can’t swing a full 20% down payment, pay whatever you can. While a no-money-down deal may seem appealing on an auto loan, you most likely will end up paying extra over time.
Plan Your Payback Schedule
Opt for the shortest loan term you are able to afford. The longer you take to pay off your car, the more you will end up paying, and the more likely you will fall into a negative equity car loan. Take a look at the different loan terms available. Then, choose the shortest loan term possible that results in a monthly car payment you can easily afford. It may be a good idea to aim for a monthly payment amount that is slightly less than the maximum payment you can afford. That way, you have some breathing room if your finances or monthly budget changes.
Take Your Car in for Regular Maintenance
Regular maintenance is essential when you want to avoid drastic depreciation in the value of your car. Minor problems like low oil or a slightly deflated tire can lead to major and more expensive problems if not addressed promptly. If you notice something looks or sounds off with your car, take it to a mechanic right away. Even if you don’t notice anything, it is best to take your vehicle in for a check-in/tune-up at least every six months or so.
Leasing vs. Buying
Before you sign your auto loan contract and purchase your vehicle, consider how often you will be driving. If you don’t drive your car often, you may be better off leasing your vehicle rather than buying it outright. There are even options where you can lease to own your vehicle if you think purchasing a car is something you may want to do in the future.
FAQS: Upside-down Car Loans
When dealing with an upside-down car loan, start by determining the exact loan balance to understand how much negative equity you have. Then, consider options like making additional payments to reduce the loan balance or refinancing into a new loan with better terms.
Refinancing an upside-down car loan into a new loan can help save money if you secure lower interest rates or better repayment terms. This can reduce your monthly payments and the overall loan balance over time.
Trading in a car with an upside-down car loan for a new car can be tricky. While it might seem like a solution, the negative equity often gets rolled into the loan for the new car, potentially leading to another upside-down loan situation.
Car buyers can avoid an upside-down car loan by making a significant down payment, choosing a shorter loan term, and avoiding add-ons that don’t add long-term value. It’s also wise to select a car that depreciates slower.
Taking a personal loan to cover the loan balance of an upside-down car loan can be risky. It might solve the immediate issue but can lead to higher overall debt if the loan has higher interest rates or unfavorable terms.
The remaining loan balance on an upside-down car loan dictates your options. A smaller balance might be manageable through extra payments, while a larger balance might require more significant measures like refinancing or trading in the vehicle.
Understanding auto loans is crucial to prevent an upside-down car loan with negative equity. It’s important to know the fair market value of the car, negotiate the best possible deal, and understand the terms and conditions of your car loan to ensure it aligns with your financial capacity.
A Word From CreditNinja Regarding Getting Rid of a Car With Negative Equity
CreditNinja knows that nobody wants to have an upside-down loan. That’s why we are dedicated to providing consumers with free and accurate financial information about budgeting, handling your finances, getting online loans, and more, for free. Ready to become a personal finance expert? Check out our blog dojo for free articles, debt calculators, and other helpful financial resources!
References:
1. Why Americans are struggling with car loans | CNBC
2. How to Get Out of an Upside Down Loan & How to Avoid | Debt.org
