How to Get Rid of Negative Equity in a Car

Ever heard the term “upside-down” on a car loan? It’s not as fun as it sounds. Negative equity happens when you owe more on your car loan than your vehicle is currently worth. This can make selling or trading in your car tricky—and leave you stuck with financial headaches. 

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But don’t worry; there are ways to tackle this situation and regain control of your finances. In this article, the team here at RateWorks will break down what you can do to get out from under negative equity and move forward without worries.

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Understanding Negative Equity in a Car

Though we briefly explained what negative equity in a car is, let’s get a bit deeper, starting with what causes negative equity in the first place. 

• Rapid Depreciation: Cars lose value quickly, especially within the first few years of ownership, which can outpace loan payments.
• Minimal or No Down Payment: A small or nonexistent down payment means you start with a higher loan balance, increasing the chance of negative equity.
• Extended Loan Terms: Longer loan terms often result in smaller monthly payments but slower equity growth, leaving you owing more than the car’s worth.
• Rolling Over Existing Negative Equity: Adding the balance of a previous loan to a new car loan only increases the total amount owed, compounding negative equity.

Assessing Your Car Equity Situation

So, how do you know if the value of your car is upside down? Here’s what to do.

Determine Your Car’s Current Market Value

Find out the current market value of your car with easy-to-use online resources such as Kelley Blue Book or Edmunds. These tools provide an estimate based on your car’s make, model, mileage, and condition. Be honest about the car’s state to get an accurate valuation, as this will help you better understand its true worth.

Compare Market Value to Your Loan Balance

Once you know your car’s market value, compare it to the remaining balance on your loan. If the loan balance exceeds the car’s value, you’re dealing with negative equity. For example, if your car is worth $15,000 but you owe $18,000, you’re upside down by $3,000. This calculation helps you assess the financial gap to address.

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How to Get Rid of Negative Equity in a Car

It can be pretty frustrating to find out that your car is worth less than you thought it was. And it’s even worse to find out that you owe more on your loan than your car’s current value, especially if you want to get a new or new-to-you car. 

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Thankfully, there are some options. 

Accelerate Loan Repayment

Making extra payments directly toward the loan’s principal can help reduce the balance faster. Switching to bi-weekly payments is another option, as it effectively results in one additional payment per year. Be sure to review your loan agreement to confirm there are no prepayment penalties before increasing your payment frequency.

Refinance Your Auto Loan

Refinancing can lower your interest rate, reducing monthly payments and the total interest paid over the life of the loan. Choosing a shorter loan term may also help align your payments with your car’s depreciation rate. However, keep in mind that refinancing may involve fees, so weigh the potential costs and savings carefully.

Sell the Vehicle Privately

Private sales often fetch higher prices than trade-ins, which can help reduce or eliminate negative equity. The proceeds from the sale can go directly toward paying off your loan. If the sale price doesn’t cover the entire loan balance, you’ll need to pay the remaining amount out of pocket.

Roll Over Negative Equity into a New Loan

Some dealerships allow you to transfer negative equity into a new car loan. While this option can seem convenient, it increases the new loan amount and monthly payments, potentially extending your financial burden. Carefully assess whether taking on additional debt is a reasonable solution for your situation.

Voluntary Surrender

If all else fails, you can return the car to the lender as a last resort. After the car is sold at auction, you’ll still owe the difference between the sale price and your loan balance. This option has a significant impact on your credit score, so it should only be considered after exploring all other alternatives.

Ready to Refinance Your Car? 

If refinancing your automobile loan feels like the best foot forward, RateWorks is here to help. And, all you have to do to get started is request a free quote. Request yours today.