Negative equity: If ever there were a phrase to avoid having applied to your car, this is one of them. Basically, the term means you owe more on a car’s loan than its market value. This makes it difficult to get out of it and into another car. The good news is there are ways to deal with it though.
Here’s what to do when you’re upside down in a loan.
Mind the Gap
Your first step is to ascertain how much difference there is between what you owe and what the car will bring if it is sold. Rather than relying upon a dealer to tell you how much the car is worth, consult Kelley Blue Book to get an idea of how much shoppers are paying for cars like yours.
You’ll see if selling the car yourself is more than a dealer will offer you as a trade-in, so perhaps the gap between what you owe and what you can sell it for is narrower than you were led to believe.
If this is the case, perhaps you can pay the difference out of pocket after you sell the car on your own.
Try Negotiating with Your Lender
The shortfall might be a function of the interest you’re paying on the loan. If so, you may be able to negotiate a lower interest rate with your lender to help bring the two numbers closer together.
Organizations like Freedom Debt Relief often use this approach to help consumers reduce credit card debt to make it easier to pay off. While they usually don’t do car loans, there is a chance you can do it on your own.
Failing that, paying more on the principal amount each month will help pay the car off sooner. This means you’ll incur fewer interest charges, which can get you closer to parity before the car’s value drops any farther.
This can help you if the negative equity situation is a function of an inordinately high-interest rate, particularly if it is because of your credit history.
If you’ve been making your car payments on time, you might find a lender willing to write a new loan against the car. This will enable you to pay the original lender off before the full weight of those higher interest payments takes its toll. Once you’ve refinanced the car closer to its market value, you can sell it and get the new car you want.
Another option might be to roll it into a personal consolidation loan like those offered by Consolidation Plus with your other debts. You can then use part of the proceeds to pay it off and get another car at better terms.
Look for a New Car with a Rebate
Manufacturers often slap significant cash back deals on slow-moving models. It is entirely possible to find a car with enough of a rebate on it to cover the difference between what you owe and what your car is worth.
Let’s say your car is worth $10,000, you owe $12,000 and you find a $30,000 car with a $6,000 rebate. When you trade your car in, the dealer will pay off your $12,000 loan to get you into the new car by rolling the other $2,000 into the price of your new car. This still leaves you $4,000 with which to reduce the price of the new car to $26.000.
If you can swing a loan on that amount, you’re good to go.
Be careful though, the new car’s resale value is likely to be lower because it is a slow-selling model. Make sure the terms of your new loan will help you avoid falling right back into the same situation.
These are among the best approaches to take when you’re upside down in a car loan. Whatever you do though, avoid rolling the negative equity of your current car into a new car. This will only serve to perpetuate your problem.