Having negative equity means that you owe more on your car loan than the vehicle is worth. Being upside down can make it more difficult to trade in or sell your car, but there are a few things you can do to pull yourself out of this situation. Let us explain.
Trading in a Vehicle with Negative Equity
With negative equity, the actual cash value (ACV) of your vehicle is less than your loan balance. Since the amount a dealer is going to give you for this car isn't going to cover what you owe, trading in your vehicle now won't do you any favors. You do have options, though.
Let's look at what you can do:
- Wait – Do you actually need a car, or do you just want one? Be honest with yourself; if the vehicle you're paying for is a bit dated but is still in working order, you probably don't actually need a new car. However, if you find yourself putting a few hundred dollars into your vehicle every few months, and the estimated value is nowhere near what you still owe, you probably need to get something more reliable.
- Pay the difference – If you find that now is the time to get a more reliable car, you can still trade in your current vehicle even if you have negative equity. You must pay off the original loan, and, because the car’s ACV doesn't cover the loan balance, you have to make up the difference in cash.
- Roll over the difference – If you find a lender that allows it, you can roll the difference into the new loan. In this case, the new lender pays off your existing contract, and then adds the deficiency balance to the new contract. It may sound good because you're getting another vehicle without having to come up with the cash to cover the negative equity in your old loan. Keep in mind, however, that you're now making payments on the new loan plus the negative equity on the old loan, plus interest charges on both.
With these options, you should be able to choose your best course of action. So, now you know that you can still trade in your car with negative equity, but is your vehicle ever going to have equity?
Getting Out of Negative Equity
Here's the thing, every mile and every day drops the value of your car. If you want to close the gap between what you owe and what the vehicle's worth, one of the best ways to do so is at the start of your loan by making a substantial down payment.
If you didn't do this, it's OK (hindsight is always 20/20!), you have plenty of options for getting your car out from underwater. While you can't build equity immediately, you can take steps to reduce the time your vehicle is worth less than the loan balance. Then, when you're out of negative equity, your trade-in can work for you, instead of against you.
Three ways to reduce negative equity more quickly include:
- Make a payment every two weeks – Rather than making a full monthly payment, you can make a half-payment every two weeks. Doing this actually equals 13 full payments at the end of 12 months, putting you ahead of the game. Just make sure your contract doesn't include prepayment penalties before you start doing this.
- Pay extra when you can – If a half-payment every two weeks isn't for you, you can just make extra payments whenever it's convenient. Any extra money you can put toward your auto loan puts you in a better position.
- Sell the vehicle yourself – When you want to get out from under a particular car but you have negative equity, selling it privately can be a good way to go because you set the sales price, which doesn’t have to be what dealerships say it's worth. This way, you may be able to sell your vehicle for what you owe, and pay off the loan.
The Bottom Line
Negative equity won't always stop you from getting rid of your car, but it can make it more difficult. If you want to move on to another vehicle but don't want to deal with negative equity, you still have options for getting into a better equity position before you sell.
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