If you’re upside down on an auto loan, it means you owe more on your car than it’s worth. Since you can’t stop driving your vehicle, you end up lowering the value even more. So, how do you stop the snowballing effect of negative equity, and are there options for those with poor credit?
Why Do I Have Negative Equity?
New cars tend to lose a lot of value after they’re driven off the lot – typically around 10% within the first month. Within the first year, a new vehicle’s value often decreases by 20%. This is depreciation – a reduction in value. Because the depreciation happens so fast on new cars, you could find yourself upside down rather quickly.
Another common reason for negative equity is a long loan term. If you take out a longer loan to lower your monthly payment, you risk even more time with negative equity (and paying more in interest), as your payments won’t be enough to keep up with the depreciation.
If you were to try to sell the vehicle, you probably won’t get what you owe. While in the case of a total loss, most auto insurance companies only pay out the actual cash value of the car, and not what you owe.
No matter how your vehicle got flipped upside down, figuring out how much negative equity you have can help you decide what to do next. Negative equity happens when the actual value of your car is less than what you owe on it. If you have a vehicle with a value of $15,000 but you owe $20,000, you have $5,000 in negative equity.
Consider GAP Insurance
If you’ve recently purchased a new car and you find yourself upside down, this is rather common. New vehicles depreciate quickly and it can be difficult to maintain equity.
To protect yourself, consider purchasing GAP insurance. You can buy GAP insurance at the dealership or through your auto insurance provider. GAP insurance’s purpose is to protect owners with negative equity by paying off the difference in the event of an accident or theft.
Using that same example from above, if you owe $20,000 on a car and its cash value is $15,000 and it gets totaled, the GAP insurance would pay the $5,000 in negative equity.
If you find yourself with negative equity, GAP insurance could be a great option until you start earning equity again.
Options to Consider When You’re Upside Down
There are ways to get out of an upside-down auto loan. Here are some solutions:
- Make extra payments – Paying more each month or making extra payments when you can could help you catch up and start earning equity. Say your monthly payment is $323, but you round up each month to $350. An extra $27 a month for one year is $324 – voila, an extra car payment!
- Negative equity trade-in – This is exactly what it sounds like: trading in the vehicle with negative equity. Using our same example from above, if we take that car worth $15,000, and you owe $20,000, you could trade it in to a dealership and see what they can offer. If the dealer offers you $16,000, you could pay the $4,000 out of pocket and get out of the hole. Or, if you don’t have the cash to pay off the $4,000, you could roll that amount over onto your next auto loan.
- Roll over – Another option is rolling your upside-down car loan into another car loan. This would mean financing another vehicle and adding the negative equity of the upside-down car to a new loan. This means a higher monthly payment and paying more in interest charges.
Think About Your Options
Finding out that you have negative equity isn’t a great feeling – but you do have options. If you’re considering trading in your vehicle with negative equity for something else but you have bad credit and don’t know where to go, we might be able to help.
At Auto Credit Express, we work with dealerships nationwide who have special financing options for those with bad credit. To start, simply fill out our free auto loan request form, and we’ll look for a dealer near you that may be able to work with your unique credit situation.