How car owners deal with increasing negative equity - nerdwallet (2024)

When Atlanta -Resident Morgan Nichole Scott financed a used Infiniti QX60 in the late summer 2020, car prices began to rise.But the single, working mother of Vier could not delay the purchase because her old car had stopped driving.

Frop until March 2023, when the prices of used cars had fallen from record high.Scott visited a dealer company that would exchange the now financed car and encounter obstacles because of a negative equity or more owed to its loan than the car was worth it.

Scott says that the dealer would not take her car as a report unless she paid the negative equity.As an alternative, the seller said she could keep her current car and get a new $ 62,000 loan for an Infiniti QX60 from 2023. It would mean that she would continue to pay a monthly car payment of $ 400 and a payment of $Add 1,300 for the new car - which brings her to $ 1,700 a month.

"I was very aware that I did not want a mortgage payment for a car payment," says Scott."I looked at the newspapers as" I know that is not what it says. "

Many car owners who bought during the Pandemie have themselves with a growing negative equity.last year.

Why does the amount of negative equity grow?

Negative equity, also known as under water or vice versa, is not new because cars are always written off.Initially, many people in the car industry and the financial sector are a perfect "negative shares" storm due to pandemic -related factors.

During COVID-19 ensured that micrachip shortages and supply chain problems caused the inventory of new cars, which used many car buyers to buy used vehicles.Mortgages on delivery to new and used cars pushed the vehicle prices to detect heights.As late as December 2022 at the top.The average transaction price for a new car for $ 49.507, according to data company Cox Automotive.Compared to $ 38,948 in December 2019, before the Pandemie in the US in April 2023 in the US hit, the average price for used cars was almost $ 27,000, an increase of 35% since 2019.

At the same time, the incentive payments and fewer consumption costs were able to improve their financial situations.

"All stars adapted to creating this scenario where people could use more and probably get higher loans. Now that the vehicle values are starting to fall, it is starting to catch up," says Chris Kleczynski, Penfed Credit Union Assistant Vice President and Headof the product for car loan.

In addition to higher credit amounts, buyers of cars required to pay more interest in interest in the past year.When the Federal Reserve began to increase the federal fund rate at the beginning of 2022, car lenses followed and reached a 15-year-old high.In April 2023, on average, Aprs of 7% was for new cars and 11.1% for use, according to Edmunds.

Kleczynski believes that negative equity is probably a bigger problem."I think we are in the early CUSP because the really used car prices started to fall at the end of last year," he says. "Incidentally, they actually stabilized and recently risen a bit.So we are still early in the cycle. "

Why it can be a problem to have a car with negative equity

Having negative equity is not necessarily a problem if a car owner holds a car, but sales or shopping in a vehicle when the loan is upside down, can be an expensive challenge.

If a person $ 30,000 owes a car worth $ 25,000, the vehicle has $ 5,000 in negative equity.The owner had a difference of $ 5,000 for shopping or selling the car.

The same applies if the car is in total in an accident.The car insurance company would only pay its current estimated value of the car, so that the borrower is responsible for the negative equity to pay the loan.

What to do about the negative equity of a car

Scott decided to abandon the purchase of a new car and to concentrate on setting the balance in its current one.

Kleczynski says it is often the best approach."At a certain moment your vehicle value will stabilize."

Paying extra to the loan every month, even a small amount, and ensuring that it goes to the loan principle, can help to become negative equity faster and to sell it easier to sell or act by car.You can also consider buyingGAP -InsuranceTo cover the difference between an insurance scheme and the payment of borrowing when the car is assembled while it is still upside down.

For some car owners it is not an option to maintain a car with a negative equity.Everything pays thousands of dollars from the point to have it or to sell.Sale or had by car androlls its negative equity for a loanThis can be the only choice for a new car.This means that you still pay a negative equity with interest as part of your monthly payment on the new car.

Chris Kukla, senior program manager for Auto Finance at the Consumer Financial Protection Bureau, says that a person should try to reduce the amount of negative equity.Use online price guides to know a fair trust value for your car, or try other waysSell your carTo get the most out of it.Car -loancalculatorTo find the lowest rate on the new loan.

Another option is to keep the car and refinancing it at a lower interest rate and payment to control negative equity.But the refinancing of a car with a negative equity may not work for everyone.

In today's rising speed environment it can be difficult to refinance to a lower rate.And to prevent you from accumulating more negative equity, you must refinance to a shorter term that requires a higher monthly payment.With a large amount of negative equity you cannot meet a lenderRequirements for Value LoanTo be eligible for refinancing.

Kleczynski and Kukla agree that car owners are wondering whether it is a need or need.The answer to this question can help determine which path is best for them.