Being upside down on your car loan means your vehicle is worth less than what you owe on it. You could be upside down and not even know it, but there are ways to get turned around. Read on to learn more about what it means to be upside down on your auto loan, how to tell if you are, and how to get yourself in a better situation.
Knowing Your Equity Position
You may have heard people talking about being upside down on their car loans, but do you know what that means? Being upside down, sometimes referred to as being underwater, means that you have negative equity. This is what happens when you owe more money on your auto loan than your vehicle is worth.
If you don't know your equity position, here's how to figure it out: use online valuation tools such as Kelley Blue Book or NADAguides to get an estimated value of your car. You can, and should, also take your vehicle to a franchised dealership for an appraisal to find out its actual cash value (ACV). Once you know how much it's worth, you can compare this to your loan balance.
If the ACV of your car is higher than the total you owe on the loan, this means there's equity in your vehicle, so congratulations! But, what does it mean to have equity and is this important?
What it Means to Have Equity in Your Car
Having, and keeping, equity is important because when there's equity in your car, it means that value can be turned into cash if you trade in or sell it. Remember, the vehicle isn't yours until the loan is paid off.
Let's look at an example:
- If you owe $8,000 on a loan, and are able to sell the car for $6,000, you have $2,000 of negative equity you owe the lender.
- However, if you owe $6,000 on an auto loan and are able to sell the vehicle for $8,000, you have $2,000 in equity that you can pocket, or use as a down payment on your next car.
In some cases, the option exists to roll negative equity into your next loan. Not all lenders allow this, and it's not the best idea if you're struggling with poor credit. Ultimately, you end up paying more in principal and interest charges by adding negative equity to a new loan. For this reason, it's better if you can cover any negative equity out of pocket instead of rolling it into a new loan.
The Bottom Line
Being upside down is a common part of having an auto loan. Unless they make a very large down payment, most people spend at least some time being underwater because new vehicles lose a good chunk of their value as soon as they’re driven off the lot.
The good news is that negative equity doesn't have to stop you from trading in your car, or selling it privately, as long as you're prepared to cover the amount with the lienholder. If this is your situation, but you don't know where to start because you're worried about not being able to get another loan with your credit, have no fear.
Here at Auto Credit Express, we can help point you toward a special finance dealer that has the lending resources you need to get an auto loan. Simply fill out our easy car loan request form, and we'll get right to work matching you with a dealership in your area!