The Nightmare of Negative Equity on a Car: 4 Ways to Get Your Car Loan Back on Track
January 3, 2019 | By Ana Elliot
In today’s world, it’s hard to think of life without a car – especially in most of America, where most families have multiple cars: one for each of age adult/driver.
Jobs, grocery stores, homes, and nice restaurants are all so spread out that we don’t live in a world where just walking here and there always makes sense. Public transportation isn’t even the best fill in – it often takes way longer to get where you need to go.
So, you need a car. If you have a family, you probably need multiple cars. This means at some point, you’ve probably bought a car and had a car loan.
Perhaps you have one at this very minute! Most of us do. Car loans, like cars, are just a part of life. But how much time have you spent thinking about the equity of your car? What about the negative equity on your car?
If you are looking at “negative equity on a car” and thinking, “I don’t think about that at all” then this is definitely the article for you.
If you have a car loan or you are planning on getting a new car and taking out a loan then you definitely need to understand what negative equity is and why it is something you definitely want to avoid. Buckle up and get ready to get learned!
Negative Equity on a Car Loan: A Horror Story
So, negative equity, in the simplest terms, is when you owe more on the car then the car is currently worth. Yikes. Ouch.
When you buy a brand-new car, it might be work $25k and so you take out a loan for $25k. But the minute you drive off the lot, it’s worth less than what you bought it for.
Some cars depreciate in value so quickly that your payments don’t keep up with the current value putting you smack dab in the middle of a negative equity situation that you never wanted to be in.
This is especially the case if you only put a little down and then chose a longer loan term because you wanted lower monthly payments.
”So what?” you might be thinking. “I’ll just keep paying the loan and keep the car forever and it won’t matter.” And you’d be right; that’s all well and good… unless you want to sell your old car to buy a new one.
If you go to a dealership and they take your old car for less than what you owe, your negative equity will get rolled into the new car loan, so you’ll owe even more on the new car than it's worth.
That means you’ll be starting your new loan with – you guessed it – negative equity. You might also get less favorable terms because you owe more than what they’re selling you.
And the nightmare continues.
Paying Off the Negative Equity on Your Car
If you don’t like the sound of this, you probably want to check on how your car loan is doing.
Check how much you owe and how much your car is currently worth. If those numbers put you in the negative equity nightmare, then keep reading. We won’t leave you in the lurch!
Here are a few ways to deal with your negative equity and get your car loan back on track!
Don’t Sell It at the Dealer
If you’re looking for a new car while you have negative equity on your current one, you should try selling it at somewhere other than a dealership.
When you sell to a dealer, they are going to try make money off of it so, when they buy it, they want to be able to sell it for higher. Because of this, they will not buy it for as much money as someone else (someone who actually wants to buy and own the car) would buy it for.
If you try sell it independently – take some nice pictures, post it online, the whole shebang – it might take longer and be more complicated, but you can probably make a few thousand more on the sale.
This might be enough to pay off your loan completely and get rid of the negative equity altogether!
Big Rebates on a New Car
A slightly less independent option to deal with your negative car equity is to look for a new car that has a big rebate.
Ideally, you’d find a new car with a great deal and a rebate that covers your negative equity. For instance, if you owe $1.5k more than your car is worth but you find a new car with a $3k rebate, then the rebate will cover your negative equity with a little bit left over. Now, this isn’t great because it does eat up a lot of the rebate but it will help get you out of the situation.
The thing to keep an eye on is that most cars with big rebates are stock clearing sales which means they are likely to be cars that will depreciate quickly. Make sure your loan terms account for that so you can avoid being in the same situation again down the line.
Pay Off the Negative Equity
If you don’t want to sell your car or get a new car, this might be the option for you. Paying off the difference of your negative equity can be a great way to get your car loan back on track.
Now, if you happen to have a few thousand dollars sitting around, congratulations! I’m not sure why you’re reading this, but welcome! For the rest of us who don’t have that luxury, paying off the difference can prove more difficult.
If you have some jewelry you don’t wear often or something else of value you can sell, that would be a great way to close that negative equity gap.
If you don’t have anything to sell but you really want to get rid of it, there can be other ways of paying it off. For instance, if you have another car that you already own (perhaps a spouse's car or one of your children’s?), you can take out a title loan on it and use that money to pay off your negative equity! With the short term period of the loan, as long as you pay it back on time, your interest won’t be through the roof! If that sounds interesting, check out our title loans !
Ride Out the Wave
If none of the above also appeals to you then, might I recommend just hanging on and just paying off your loan?
If you want to keep your car and you aren’t planning on getting a new one, just keep plugging away with your payments. The good news when it comes to the deprecation of your car’s value is that it slows with time.
The biggest drop is in the beginning (so odds are, it’s already happened) so if you keep paying, eventually your payments will catch up with the value of the car. The perks of this option is it also looks great on your credit report and will help your credit score in the long run!
Whatever your decision--however you chose to deal with your negative equity car loan, just make sure you do your research.
And, in general, keep an eye on your car loan and how much your car is worth and make sure you know whether your loan is in the negative or positive. There is no reason to get lost in the nightmare if you stay aware and have a plan!