What Can I Do If I Have Negative Equity on My Car?

How Negative Equity Works  

When you take a car loan, you don't pay for it all at once. Instead, you make payments over time. However, you could end up paying more on your loan than the car is worth because cars, especially new ones, lose value quickly. Note that cars depreciate at different rates, for example Jeep Wranglers depreciate slower than all other cars – they rank #1 for best resale value. 

This situation is called negative equity. If you want to keep the car for a long time, it's not a big deal because your loan debt will eventually equal the car's value. But if you want to sell or trade in your car, negative equity can be a problem. 

Common Causes of Negative Equity Car Loans  

Here are some common reasons why people find themselves with negative equity on their vehicles:  

1. Buying a Car You Can't Afford 

People usually get enthusiastic when buying a car and spend a lot on unnecessary purchases. If you're a new car buyer, stick to a budget and limit your monthly payment to 10% of your income. 

2. Avoiding a Down Payment

A longer loan duration may seem attractive especially when it comes with lower to zero down payment. However, longer loan periods with low down payments mean higher interest rates and increased total payment. 

3. High-Interest Rates or Long Loan Terms

Larger total payments are the result of longer loan terms and higher interest rates, especially if you have poor credit. Longer terms might mean smaller monthly payments, but they can also mean paying more interest throughout the loan. 

4. Rolling Previous Loans into a New One

Consolidating prior vehicle loans into a new one may seem like a simple remedy, but it might lead to more debt. Before merging loans, you should carefully analyze your resources to ensure that you can afford the extra payments. 

Effective Approaches to Eliminate Negative Equity  

If you discover yourself facing negative equity, here are actionable steps to face the situation:  

1. Continuing Payments

If you pay your loan back on time every time, you will ultimately get to the point where the worth of your vehicle exceeds the amount you owe on it. 

2. Making Extra Payments

You can speed up the payback process and lower negative equity by giving a greater amount to your auto loan. Even additional payments might pile up over time and help you get ahead financially. 

3. Refinancing

If you owe more on your car than it's worth, refinancing might be a good idea. By refinancing at a lower interest rate, you might be able to lower your monthly payments and pay off the negative equity faster. 

4. Selling the Car

If you no longer require your vehicle or cannot afford the recurring costs of ownership, selling it entirely could be an excellent option. A vehicle sold at its present market value could help you break even or reduce losses, even though you still need to settle any outstanding loan obligations. 

5. Trading In the Car

Another alternative is to trade in your car for a more cheap or suitable vehicle. While trading in will not completely remove your negative equity, it may help you change to a more manageable financial situation by rolling the remaining sum into a new loan. 

6. Seeking Professional Advice

Finally, consulting with a financial advisor or credit counselor may give useful information. They can assist you in evaluating your choices, developing a personalized strategy, and successfully navigating the complexity of negative equity. 

The Impact of Negative Equity  

Negative equity carries significant consequences:  

• Challenges in Selling or Trading: Consider the disparity between its value and the remaining loan balance when selling or trading your car.
• Financial Pressure: Negative equity results in financial strain, particularly if you're grappling with hefty monthly payments.  
• Influence on Future Financing: Carrying over negative equity into a new auto loan might create a debt cycle that hinders financial growth.

You must deal with negative equity as soon as possible to lessen its negative impact on your financial well-being. 

Discover Actionable Steps to Tackle Negative Equity in Your Car Loan Today  

You may take proactive steps to resolve negative equity on your vehicle. With these tips, you are well on your way to achieving a better financial position and getting back on track. At Carhub Caledon Chrysler, we're here to simplify your car ownership journey and help you find the best solutions tailored to your needs.  

Looking to apply for a car loan? Talk to one of our experts now.