Without even knowing it, you may have found yourself in a financially precarious situation: stuck on your car loan.
Maybe you bought a new car without making a down payment. Or perhaps you have opted for low, “easy” monthly payments by extending your loan to 72 or even 84 months.
Regardless of how you got there, it's time to get back on track and avoid serious problems in the future.
What it means to be upside down
If you're upside down on your car loan, it simply means you owe more than the car is worth. This is sometimes called underwater on the loan or a negative equity car loan.
So if your car is worth $10,000 but your loan balance is $12,000, you're upside down by $2,000. If you want to get rid of your car, not only do you have to sell it or trade it in, but you also have to pay the lender $2,000. This is also called negative equity.
But if you have positive net worth (you owe less debt than the value of your car), your car becomes an asset, giving you more financial flexibility in life. For example, with $2,000 in equity, you can trade in your current car and have $2,000 as a down payment on another car.
Remember thatto determine the value of your caris not an exact science. The value also depends on whether you trade in or sell to a private buyer.
Why it's risky
Being upside down isn't automatically a problem if you can keep up with the payments and keep your car until the loan is paid off. But life is unpredictable and things can change quickly.
Here are a few common situations where upside down can be treacherous:
Uw auto is total loss.After an accident, the insurance company will pay out the current value of your car (based on their estimate). But if you're upside down, you'll owe the lender that amount plus your negative equity – potentially several thousand dollars out of pocket.
You cannot keep track of payments.If you're struggling to make ends meet and want to downsize to a cheaper car, you'll need to give up your current car and pay the negative equity as well. It is a difficult task if you are already short on cash.
You suddenly need another vehicle.Maybe you drive a sports car now, but you find yourself having a baby soon. You want to trade in the sports car and buy a minivan. Here too, you pay the amount you owe above the trade-in value of the sports car.
Find out where you stand
Solving your situation starts with finding out the status of your loan.
Check your loan balance.Contact your lender or review a recent loan statement to see how much you owe.
Estimate the value of your car.Look up your car's trade-in value in price guides such as Edmunds.com, Kelley Blue Book or the National Automobile Dealers Association (NADA). This will give you a conservative estimate as trade-in prices are lower than private party prices.
Do the math.Subtract the loan balance from the car's value. If the outcome is positive, you have equity. If it's negative, you're upside down.
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Come back right side up
Now that you know where you stand, you can take action. While these steps aren't easy, they will give you peace of mind knowing you are moving in the right direction.
Make additional payments.The faster you pay off your loan, the faster you eliminate negative equity. This can also reduce the amount you pay in interest. Make sure additional payments go toward your principal.
Refinance with a shorter loan term. Refinancing your carwon't reduce your remaining loan balance, but it can help you get ahead faster and save you money in interest over time. However, this option means a higher monthly payment, so make sure you can afford it. The useCar loan refinance calculatorto see what makes sense for you.
"Drive through" de lening.If you continue to make on-time payments, you should eventually catch up on the car's value and start building equity. However, this takes time and patience. If you have a significant amount of negative equity, consider buyinggap insurance, which would cover the difference between an insurance payout and the amount owed on the loan.
Bury the negative equity in a lease agreement. You may be able to trade in your car for a lease car, then return the car and walk away. Your payments will reflect negative equity, but at the end of the lease you walk away and owe nothing.
The dealer is not your friend
Whatever you do, avoid the temptation to put yourself at the dealer's mercy. Chances are they will put the negative equity into a new loan and you will be worse off than before. Instead, take control of the situation and do what is right for you now and in the long run.
FAQs
Get right-side up again
How to get out of an upside-down car loan with negative equity? ›
How can I get out of an upside-down car loan with negative equity? You may be able to get out of an upside-down car loan by paying it off in a lump sum or with extra payments, refinancing your car loan, selling your vehicle or surrendering it to your lender.
How to handle negative equity in a car? ›
Refinancing the loan or selling the vehicle are two of the most commonly used ways to deal with negative equity. You may also consider trading in your vehicle for a different car, though that can lead to additional auto loan debt if you're rolling the original loan balance over.
How much is too much negative equity on a car? ›
How Much Negative Equity Is Too Much on a Car? The maximum negative equity that can be transferred to your new car is around 125% . It means your loan value should not be more than 125% of your car's actual worth. If it is more than 125% then your next car's loan would not be approved.
Can you roll over 10k in negative equity? ›
When you trade in a car with negative equity, the equity will likely roll into your new vehicle loan. Here's an example… If your current vehicle has $10,000 in negative equity and your new car costs $20,000, you will take out a $30,000 loan from the lender.
Will GAP insurance cover negative equity? ›
Does GAP insurance cover negative equity? Yes. Negative equity (aka an upside-down loan) is another term for the gap between what you owe on your auto loan and the car's actual value. GAP insurance covers the difference between the two.
Does CarMax roll over negative equity? ›
In some cases, the negative equity can be included in your financing if you buy a CarMax car. If not, we'll calculate the difference between your payoff and our offer to you and you can pay CarMax directly. If the amount you owe is less than $250, we will accept a personal check.
Will a dealership pay off negative equity? ›
If you owe more than your trade-in value – often referred to as “negative equity” – a dealer or lender may offer to roll the balance of your existing auto loan into a new auto loan, but this will make your new auto loan more expensive.
Is it smart to trade in a car that isn't paid off? ›
While you can trade in a financed car at any time, it is most beneficial to wait until you have positive equity before doing so. It is also a good idea to wait at least a year or more before trading in, especially if you purchased your car brand new.
Can I refinance a car with negative equity? ›
Can you refinance a car if it's upside down? Yes, you may be able to refinance your car even with an upside-down car loan, though it will depend on how much you owe. Borrowers with good credit typically qualify for up to 120% of the value of the car, while those with bad credit qualify for around 80%.
Trading in a car with negative equity can be beneficial if you can find a vehicle that is less expensive and fits into your budget. However, you need to be careful, as you could go into greater debt and more negative equity.
Does leasing get rid of negative equity? ›
A common way to get out of negative equity is to trade in your current vehicle for a leased vehicle. This not only gets you out of the red on your investment, but it also helps rebuild credit as you make manageable monthly payments.
Can I trade in a car I'm upside down on? ›
If your car is worth less than what you still owe, you have a negative equity car also known as being “upside-down” or “underwater” on your car loan. When trading in a car with negative equity, you'll have to pay the difference between the loan balance and the trade-in value. You can pay it with cash.
How to get out of an upside down car loan? ›
How to Get Out of an Upside-Down Car Loan
- Calculate Negative Equity. The first step is to know just how underwater your car loan is. ...
- Contact Your Lender. ...
- Continue Making Payments. ...
- Make as Many Payments as Possible. ...
- Refinancing an Upside-Down Loan. ...
- Selling Your Upside-Down Vehicle.
If you wish to sell a financed vehicle with negative equity, you'll either need to pay off the remaining loan balance out of pocket or roll that amount into a new loan. It's important to proceed with caution with either approach, especially when it comes to new financing.
How to eat up negative equity in a car? ›
While these steps aren't easy, they will give you peace of mind to know you're moving in the right direction.
- Make extra payments. The faster you pay down your loan, the faster you'll eliminate the negative equity. ...
- Refinance with a shorter loan term. ...
- “Drive through” the loan. ...
- Bury the negative equity in a lease.
You can transfer negative equity into a new car. This is referred to as rolling over the loan. Dealers can sometimes recommend rolling the negative equity into your next car loan. This is very convenient, but it is not advised.
How to get out of a flipped car? ›
Check your windows to determine the safest exit and crawl towards it. If the integrity of the car has been sustained, the door may open freely. If not, you'll need to either roll down or break a window to create an escape route, being careful to clear away any glass shards or debris before exiting.
Can a lease get rid of negative equity? ›
A common way to get out of negative equity is to trade in your current vehicle for a leased vehicle. This not only gets you out of the red on your investment, but it also helps rebuild credit as you make manageable monthly payments.
