What is a Negative Equity Car Loan And How To Fix It
You’ve heard of a negative equity car loan, but you’re not quite sure what it means. The truth is, as soon as you drive your new car off the lot, it depreciates in value by as much as 11%. For a car that costs $20,000, you could lose $2,200 just by driving it home.
Such quick depreciation means that it can be easy to wind up going upside down on your car loan. And being upside down on your loan is not a fun place to be.
If you’re looking to sort out your finances, or maybe contemplating how to trade in a car with negative equity, there can be so much you need to do to sort it out. This is important if you owe more on your car than what it’s worth.
Going upside down on a loan is also known as having a negative equity car loan. Here, we’re going to talk about what that means and how to help you sort it out.
How You Got Here
There’s more than one way to end up upside down on your car loan. It’s so important to understand how you got to where you are if you’re planning to exchange one car for another. Also, knowing how you got here will help you avoid the same mistake in the future.
You Bought a Car You Couldn’t Afford
One of the ways to go upside down with a negative equity car loan is purchasing one that you couldn’t afford. This is so easy to do.
Most experts say that your car payment shouldn’t be any more than 10% of your gross income, no matter how much money you make.
WATCH THIS GREAT VIDEO THAT SHOWS WHY MOST CAR SHOPPERS GET UPSIDE DOWN ON THEIR AUTO LOANS
Not Enough Down Payment
When you already don’t have enough money to purchase your car, you wind up stretching your budget until you cant afford a down payment. When you do this, you can drive off the lot with a new car and never even open up your wallet.
Because of the way cars depreciate as soon as you drive them off the lot, once your wheels leave their pavement you become upside down on a loan. Even if you can afford your payments, it’s still risky.
This can even pose a problem for insurance purposes. Say you get into an accident right off the lot. Most insurance companies reimburse their clients only for what the car is worth, not what they owe on the loan.
One way to avoid this is to make sure your down payment covers the loss in value.
Your credit score is what changes your interest rate the most. A lender’s primary concern is limiting their risk.
If you didn’t qualify for a low-interest rate loan, you’re much more likely to go upside down.
One way to avoid this is to get prequalified before making any decisions to stop you from signing up for a high-interest loan for the sake of getting your deal finished quickly.
When you’re financing your car, you might hope to stretch out your budget by stretching out that loan. But lengthening your loan also means maying more interest at a higher rate. This can mean you spend hundreds or thousands of dollars in interest payments.
It’s easy to go upside down in this way, too. By the time you are close to the end of your loan and looking for a trade-in, your car will have depreciated enough to make its value less than what is owed on the loan.
Loan Roll Over
Loan rollover is a way to provide temporary financial relief while also getting into a new vehicle. But it’s important to remember that each time you do this, your debt increases.
You could start with something small and then snowball, keeping you permanently behind and in a state of underwater on your loan.
How to Fix Your Negative Equity Car Loan
You should consider one or many of these options to help you get out from underwater on your car loan faster.
Making payments for a longer time will help you break even sooner and help you get right-side up on your loan again. But, if this were easy to do, you’d likely already be doing it.
Even a few extra months of payments can help lower the burden of your upside down loan.
Look at your budget. Are there any places where you can cut back for a little, even if its just a little bit?
If possible, consider parking your car in a garage and canceling your car insurance for a while. You could save a few hundred dollars here, and then pay that towards your principal.
Just ensure that you get reinsured before you go for a drive again.
This method isn’t exactly the most conventional, maybe, but it works if you’re unemployed or don’t need to drive every day to your job.
To refinance your loan, contact the company that owns your car. If they can lower your rate, that means more of your payment goes towards your principal. This will close the gap between what your car is worth and what you owe much quicker.
Refinancing might also extend your loan. Like we mentioned before, this can general more interest for you.
Time is of the essence here. The sooner you refinance, the sooner you can break even.
Remember, lenders will want to work with you if you come to them before your loan is behind. Vehicle repossessions can happen quickly, and make it hard to get a loan in the future.
This won’t fix your problem, but it might help make it more manageable.
Try to find a credit card program that allows you to shift balances. If you can pay down your car loan with a credit card, you could even end up with a year without interest payments.
If you choose to go this route, continue to make those payments as often as you can, as quickly as possible. You don’t want to exchange one problem for another.
Earn Some Cash
Cutting your expenses down and shifting your debt are two ways to find relief. But that might not be enough.
You might want to consider selling some of the stuff you have in your attic. A second job or overtime work are also great options.
As a last resort, selling your car might be the best option for you. Maybe it won’t get you out all the way, but it could help to relieve some of the debt you’re experiencing.
More Than Car Loans
Having a negative equity car loan is difficult. It can feel like a heavy burden. But if you work hard and follow some advice, you will be in the green again soon.
For more information on negative equity car loans and how you can help yourself get out of debt, contact us for more information. Handling your personal finances can be hard, but you don’t have to do it alone!
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