Should You Trade in Your Car With Negative Equity?
What does it mean to be “upside down” on your auto loan and how to mitigate your losses…
This financially challenging situation arises when the market value of your vehicle decreases below the outstanding amount of your auto loan. There are several factors that can lead to this predicament, with the most common being vehicle depreciation.
It's worth noting that most new vehicles lose approximately 20% of their value as soon as they're driven off the lot and up to 50% of their value by the third year.
However, with proper research and preparation, you can broaden your possibilities to overcome this dilemma and alleviate the burden of mounting negative equity.
If your monthly payment is within your budget, your priority is to continue to make on-time payments as it pays down the loan and lowers the balance of the amount owed. This protects your credit score and will make it easier to get a better loan term in the future.
One way to get out of negative equity is to pay off the remaining balance on the loan as quickly as possible. If you can afford it, consider making higher payments than the required monthly amount to clear the interest faster and reach an even equity status more quickly. Start by contacting the institution that financed your car loan to determine the payoff amount. Then, use a valuation guide like NADA to calculate the difference between the loan balance and the car's current value. If the difference is manageable for you, consider paying it off to get back to an even equity status.
Rolling the negative equity into a new car loan may seem like a quick solution, but it has many more downsides. While some lenders may allow you to do this, it essentially just adds the negative equity to your new car loan, putting you back in the same position of owing more than the car is worth. This may lead to a longer loan term or higher monthly payments, which can cause more financial strain in the long run. Therefore, carefully consider whether this option is the best solution for your situation.
It can be beneficial to be upfront and honest with your lender about your negative equity situation. By initiating a conversation with them, you can explore the option of refinancing your car loan. This approach could lead to a lower interest rate, which would help to decrease your negative equity over time. If your loan is a simple interest loan, you can also make additional payments each month without incurring penalties, which can further reduce your negative equity.
One option to consider when dealing with negative equity on a car loan is to apply for a personal loan with a lower interest rate than your current car loan. By using the personal loan to pay off the negative equity, you will still owe money but at a lower interest rate, which can effectively reduce the total amount owed. However, keep in mind that obtaining a personal loan may be difficult if you have poor credit or a high debt-to-income ratio. Make sure to shop around for the best rates and terms before making a decision.
When considering selling your car, trading it in to a dealer may seem like the simpler option, but selling it privately can result in higher returns. In fact, selling your car privately is the most effective way to get the best value for your car and avoid negative equity. While it may require more time and monetary investment, ExoticCarTrader.com offers a solution that streamlines the process for you. You can read more about selling privately on our how to sell a car privately guide.
Whether you’re selling a flashy Classic Car, Supercar, Luxury Car, or Exotic Car we are here to make the process easy and get you top dollar. Exotic Car Trader makes the process a whole lot easier. In many situations, selling your car presents a financially painful experience in addition to spending hours of your time with tire kickers and time wasters.
As a brick-and-mortar company with strong ties to our local South Florida car culture, we pride ourselves on superior customer service and some of the lowest consignment fees in the country. If your car would look right at home with our current cars for sale, consider learning more about our car selling program.
We are not attorneys. This article does not contain legal advice.
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