If you're dealing with a car that's underwater, or has negative equity, it's important that you know how deep underwater you are before you attempt to trade in or sell your vehicle. The less negative equity you have in your car, the better.
How Negative Equity Affects You
Equity is the difference between the actual cash value (ACV) of your car and the amount you owe on your loan. If you owe more for the vehicle than it's worth, you have negative equity.
Most of the time, negative equity really doesn't affect you until it's time to trade in or sell your car. But when you do need to trade in your ride, the more negative equity your vehicle has, the more expensive getting out of your current loan is. The less you get for your car, the more money you have to pay out of pocket to pay off your auto loan – which needs to happen in order to transfer the title to someone else.
Do You Have Negative Equity?
In order to find out if your car has negative equity, you need to get a 10-day payoff quote from your lender. This tells you how much you owe on your auto loan, plus an additional 10 days of interest charges. Then, find the estimated sale or trade-in value on a valuation site such as Kelley Blue Book or NADAguides.
By subtracting the estimated value from the payoff amount, you can see if you have equity or not. If you find out your vehicle is worth more than you owe, congratulations! You have equity in your car. Similarly, if you own your vehicle outright, it's total ACV is considered equity.
However, if you do the math and find that you're in a negative equity position, your next steps are going to depend on how much negative equity you have. If you're only slightly in a negative equity position, you may have an easier time selling or trading in your car. If you have high negative equity, you're probably going to be better off trying to close the equity gap before you try to trade or sell your vehicle.
Overcoming High Negative Equity
When you have a large gap between the ACV of your car and the amount you owe to your lender, you may have to dig deep to come up with the money to pay off your loan. A good alternative is to take a little time to and try to bring your vehicle into a positive equity position.
There are several ways you can turn high negative equity around. If you have the time to wait before you need another ride, try these tips:
- Make larger loan payments. If you don't need to get a new car right away, you can put a serious dent in the negative equity your vehicle has by making the biggest payments you can make. This way, when it's time to sell or trade your car, you won't have to use as much out-of-pocket cash to make up the difference.
- Make a lump sum payment for the difference. If you have the funds, you can make a large lump sum payment to your lender for the amount of your negative equity. This can be a good move if you're coming into a chunk of change you wouldn't normally have, such as a tax refund or stimulus check. If you're not ready to give up your current loan, doing this now can put you in a better position when the time is right.
If you don't have the time to wait for your vehicle to come into an equity position, it may still be possible to sell your car or trade it in.
Rolling Over Negative Equity
It's quite common for a lender to allow borrowers to roll their vehicle's negative equity into their next loan. This isn't an option everywhere, though, so you may have to shop around to find the right deal for your needs, especially if you're trying to trade in a car with high negative equity. You're likely to have an easier time finding a lender to work with if there's less negative equity to roll over.
When a lender allows you to roll over your negative equity, they pay off your original loan contract, but add the amount of negative equity to the cost of your next vehicle. This increases the amount you have to borrow for another car, as well as the amount you have to repay over your loan term.
Perhaps the hardest part of rolling over negative equity is that you're starting off your new auto loan with negative equity. This is actually common when you finance a brand new vehicle, because new cars tend to lose around 20% of their value in the first year of ownership. If you're purchasing a used vehicle, rolling over negative equity could put you in a worse equity position – one that you may not have reached otherwise.
Whether you're financing a new or used car, the best way to combat negative equity is by making the biggest down payment you can up front. If you have poor credit, chances are that you have to make a down payment to get into an auto loan anyway. Making the biggest down payment you can leaves you owing less, which can close the equity gap right from the start.
Ready to Find Your Next Car?
Now that you know what to do when you have high negative equity in your car, the time may be right to trade in to a more affordable vehicle. You don't have to take these steps alone, The Car Connection can help.
We've cultivated a large network of special finance dealerships from around the country that are signed up with subprime lenders. Don't get frustrated trying to find a dealer on your own. Instead, fill out our free auto loan request form to get matched with a dealership near you.