Is Your Car Loan Upside-Down? How to Handle Negative Equity

Have you ever valued your trade-in and realized that your vehicle is less worth than you still owe on the loan? If yes, your car has negative equity, also known as your auto loan being upside down.

Since a car doesn't grow in value like a home, you can end up in big trouble if you are upside down on an auto loan. A car is not an asset or an investment but rather an expense.

Luckily, there are ways to get back to positive equity if you find yourself in this unfortunate situation. Read on to learn what an upside-down car loan is and how you can get out of a car with negative equity.

What is an upside-down auto loan?

Finding yourself upside down on an auto loan results when you owe more than the car is worth. In short, you have a negative equity.

Since a car loses 9% to 11% the moment you drive it off the lot and about 20% after one year, upside-down loans are nearly inevitable. If you buy a car worth $25,000, for instance, it will probably be worth $20,000 after one year. Depending on the amount of money you put down, you might already owe more than the vehicle is worth.

You are less likely to get enough money to cover what you owe when you sell a car with negative equity. Moreover, insurance only pays for the car's value if you are involved in an accident, no matter how much you owe. That means you will still owe the loan balance, making getting a new vehicle more challenging.

How you get upside down on an auto loan

You can find yourself in a negative equity situation for a number of reasons. These include:

Getting a bad auto loan deal

Taking out an auto loan from the first lender you find without shopping around can lead you to an expensive car or an unmanageable payback schedule. You might find yourself in an upside-down auto loan if your debt is accumulating quicker than you can pay it off.

To ensure you get the best deal on a car loan, shop around at multiple lenders before committing to any loan. This will help you get a good idea of what is offered in your area for your financial situation.

Taking out deceptive no-money-down auto loans

Buying a car with no down payment might be a great way to save money. You get to drive your dream car without paying a dollar.

However, when you don't put money into a car, you end up financing the cost of the car, taxes, licensing, and registration fees. These payments may creep on you later, making your amount financed bigger than the car's value.

You may also end up with a negative equity loan from the start if your car significantly depreciates in value. A good down payment can help maintain positive equity and lower your monthly payments, plus the amount you pay in interest over the life of the loan.

Getting a long-term auto loan

Long-term loans usually result in smaller monthly payments, making them attractive to borrowers working under tight budgets. However, a car loan with a long payback schedule can spread out payments, and your vehicle may lose its value quicker than you can pay off the loan.

The longer it takes to repay your loan, the more you pay on interest, and the more likely you will get negative equity. Make sure you choose the shortest loan term possible and one that you can comfortably afford.

How to get out of an upside-down car loan

The only way to get out of a negative equity is to repay the total balance on your auto loan. However, unless you have totaled your car in a wreck or want to sell it faster, there are ways to get out of a car loan you can no longer afford. So, what are the solutions if you find yourself upside down on an auto loan?

Calculate your negative equity

Before you can start getting out of an upside-down auto loan, you will need to calculate your negative equity. To do this, subtract the appraised value of your vehicle from the remaining auto loan balance you owe.

You can determine your car's value using reputable online sites like Edmunds or Kelly Blue Book. To determine your loan balance, subtract the amount you have already paid towards the loan from the original total loan amount.

Refinance your loan

Refinancing your auto loan at a lower interest rate is perhaps the quickest way of getting out of negative equity. While refinancing doesn't get rid of your auto loan debt completely, it makes it easier to pay off more principal every month, get out of debt faster, and save money on interest.

However, be careful not to take out another loan where the terms exceed your vehicle's value. Use an auto loan calculator to see whether you can afford the loan and to determine how much you could save.

Sell the car

If you cannot afford another vehicle right away, you can sell yours straight away to a private buyer or a dealer. Selling your car can give you more room to negotiate a price that could allow you to get enough money to nullify the negative equity. However, you will need to make up the difference out of pocket or take out a small personal loan if you can't get enough from the sale to pay off the negative equity.

While it's true that you will get more cash by selling your car to a private buyer, notify your lender first of your intentions. You should also check whether the loan is transferable to another party.

Make extra payments

Repay your loan faster by making extra payments if possible. Regularly paying extra on your monthly payments will reduce the interest rates and charges you will have to pay over the life of your auto loan.

You can also save up and pay off your loan at once with a lump sum. Paying off before the scheduled time can help you save money. However, make sure to check your loan agreement to be sure you won't be charged for paying off the loan early.

Continue making payments

If you want to get out of your negative equity, continue making payments on your loan until you pay it off or the loan amount is lower than the vehicle's value. This route can be time-consuming, but it's a great way to acquire equity in your car if you decide to sell it.

Staying on top of auto loan payments can also help avoid account delinquency. It's much better to make regular monthly payments than to ignore the loan as you search for a better deal.

Surrender the vehicle

Surrendering your car to the lender is the last resort for getting out of an upside-down auto loan. Voluntary surrender may be better than letting the lender repossess your vehicle.

If the lender repossesses your car, but the sale doesn't cover the loan balance, they might still hold you accountable for the remaining balance. Vehicle repossession can also greatly hurt your credit score.

Final thoughts

Finding yourself upside down on an auto loan can be a real mess, but there is hope. If you stay disciplined and apply these strategies, you can come out of this debt successfully. Instead of looking for a quick and costly solution, consider all your options to find the best repayment method.