When you owe more on your auto loan than what your vehicle is worth, you’ve got a negative equity problem. It’s common and not necessarily a bad thing all the time, but it can cause some issues if you need to sell or trade in the car.
How Does Negative Equity Go Away?
Being in a negative equity position, also called being upside down on your loan, means that you owe more on your vehicle than what it’s valued at. Equity is the opposite, meaning you owe less than what it’s worth.
Negative equity happens when your car’s value falls below what you borrowed to buy the vehicle, and it happens to newer cars pretty often. Over time, vehicles lose value. This is called depreciation, and it’s the silent killer of your car’s value – it never stops, but it does slow down over time. Newer, better vehicles are released all the time, which lowers older car values, and putting miles on your vehicle lowers its value too.
Negative equity goes away when it’s paid off, simple as that. You can’t sell your financed car until the loan balance is covered, either. When you finance a vehicle, your car gets a lien on the title, which prevents you from selling it until the loan is complete or you get a big enough offer to pay it off.
Your auto loan doesn’t have to be completed to sell your vehicle. If you put your car up for sale before your loan term is up, and get an offer high enough to cover your loan balance, you can release the lien and sell the vehicle. Selling a car with negative equity won’t automatically negate your negative equity – it still needs to be paid to release the lien.
Selling a Car With Negative Equity
If you try to sell your vehicle to someone else for less than what your loan balance is, the lender can't release the lien. This is where negative equity causes problems. If you have a car that’s only worth $2,000 but you owe $4,000, you may only get an offer around its value. If you find yourself in this situation, you have to come up with the remaining balance out of pocket if you want to pay off your loan to release the lien.
By continuing to pay on your auto loan as normal, or even by making extra payments when you can, you can lower your loan balance to catch up to your vehicle’s actual cash value (ACV). If you can’t wait until you’ve paid off your car’s negative equity naturally, you may have other options to explore.
Rolling Over Negative Equity
There are some lenders that allow you to put your negative equity on your next auto loan, called rolling over your negative equity.
When you roll over your negative equity, you’re adding it to your next loan. If you had $3,000 in negative equity and rolled it over on your next loan of $15,000, your total loan amount is $18,000.
This is usually considered a last resort. Rolling over your negative equity is a surefire way to put yourself right back into a negative equity position, and you almost always end up paying more for your next vehicle than it’s worth.
Waiting Out Negative Equity
One of the best ways to get out of a negative equity position is by waiting it out. Like we mentioned, depreciation is one of the biggest culprits in causing negative equity. However, depreciation slows down over time.
If you recently took out a loan on a new or newer car, after a few years, your loan balance is likely to catch up to its value. You can also pay extra when you can, or round up your monthly payment to pay off your loan faster. Having equity is a great position to be in, since it can be used as a down payment on your next vehicle, and it makes it easier to sell your car if you need or want to.
Sometimes, though, your interest rate could be making it hard to pay down your auto loan quickly. For some borrowers, refinancing is the solution to lowering their interest rate. The catch is, though, you can’t refinance until your loan balance is equal to or less than your vehicle’s ACV.
You can keep track of your car’s value by visiting websites like Kelley Blue Book or Black Book. These sites offer trade-in estimates and private-party valuations for vehicles. Check out what your car is selling for in the market, and compare it to your loan balance.
With a little time and patience, you can catch up your loan to your vehicle’s value and pull your car out of negative equity. If you get to a point where your loan balance is equal to your vehicle’s value, you may be able to refinance to lower your interest rate and pay less for your car over the course of its loan.
Looking for Another Vehicle?
Selling your current vehicle doesn’t make negative equity disappear, but you may be able to roll over your negative equity if you’re in a pinch.
However, many traditional lenders can’t work with every credit situation. If you’re in need of bad credit lending resources for your next auto loan, then start right here at Drivers Lane.
We’re connected to dealerships all over the country that are signed up with subprime lenders that are experts in assisting borrowers in unique credit circumstances. Fill out our free car loan request form, and we’ll begin the search for a dealer in your local area.