When your car isn't worth as much as you owe on the loan, it’s called negative equity, being upside down, or having a loan that's underwater. This is a common occurrence unfortunately, as vehicle values can drop quickly – especially when you're financing new. So, how do you combat falling car values and keep yourself afloat?
3 Options to Right Your Equity Position
Vehicles lose value as soon as you drive them off the lot, and continue to do so throughout their lives. This loss of value is called depreciation, and it can't be stopped. Though you can't halt depreciation, you can make up the difference between your loan balance and the value of your car over time.
An upside-down auto loan isn't necessarily a problem until you need to sell or trade in your vehicle. The extra cash from your car’s value can help a lot when you need money put toward your next vehicle.
If your car is upside down, you're typically going to pay enough on your loan to cross the threshold into an equity position eventually. However, many borrowers can't wait that long to be out of their vehicle. This leads to people looking for ways to get out of an auto loan with negative equity.
There are three options that are common if you'd rather not wait it out:
- Pay more, faster – By making larger payments on an accelerated schedule, you can get your loan below the actual cash value (ACV) of the car sooner and keep building credit with your current loan while you do.
- Pay negative equity out of pocket – If you're eager to trade in your vehicle, you can add out-of-pocket cash to the money offered from a buyer in order to repay your existing loan before getting into a new one.
- Roll over the negative equity – This is often offered to borrowers who bring negative equity trade-ins to a dealership. If you're a borrower with poor credit, it's best to take this with a grain of salt. Even though it's a legitimate offer where the dealer pays off your old loan, your negative equity gets added to your new loan, starting you off in an even greater negative equity position on your next car.
Start Your Car Loan Right
Since it makes sense to want the most value out of your vehicle as possible, there are also three common ways to start off your new loan on the right foot. This means closing the gap between ACV and loan amount before it has a chance to get the better of you.
To help yourself from spending too long upside down on an auto loan:
- Make a big down payment – A down payment is one of the best things you can do for yourself in a car loan. If you put down enough money, you may even be able to eliminate that equity gap altogether. The more money you put down, the less you borrow, which means your loan amount and vehicle value have more of a chance to stay on level ground.
- Take on a shorter loan term – To stay out of negative equity, it's important that you don’t stretch out your loan too long. If you pay small monthly payments slowly, your car could depreciate faster than you pay down your loan. A good tip is to balance the length of your with your monthly payment. Use the shortest loan term and the highest payment that you can comfortably make.
- Finance a less expensive vehicle – It's all about money over time when you're talking about equity, so the less money you ask a lender for, the less chance you have of being in negative equity. You can sometimes keep yourself in the right position by choosing a less expensive car. If that's not enough, add a large down payment to the lower sticker price to improve your equity position.
These are just three ways you can start off a loan on the right foot, but they're not the only ways you can stay on top of the equity in your loan.
Need Help Getting Started?
Whether you need to get out of a negative equity position, or you're looking for financing and don't want to start out upside down, we've got you covered! If the time is right for you to begin thinking about your next auto loan, you can start your search right here at The Car Connection.
Not only can you research new and used vehicles, you can fill out our fast, free, easy car loan request form and start down the path toward a dealership that can help. We've cultivated a nationwide network of special finance dealers that are signed up with lenders that are prepared to assist borrowers with many types of credit, including bad credit, no credit, and bankruptcy. Don't hesitate to get started on your next auto loan today!