An upside-down or underwater loan is one where you owe more than the car is worth. This negative equity can be quite common nowadays due to longer-term loans and depreciation.
If your underwater auto loan has you feeling submerged, we’ll take a look at some solutions. But first, let’s see if your loan is upside down in the first place.
How to Tell If You Have Negative Equity in Your Car Loan
Calculating your vehicle’s equity is simple:
Equity = Value of your car – loan payoff amount.
You can find the current value of your car by visiting the Kelley Blue Book site. Edmunds offers a similar service, as does the National Automobile Dealers Association (NADA). Since each site may vary in terms of estimated value, take the average of all three to come up with an official number.
Do not use the loan’s principal amount in the calculation. Use the loan payoff amount instead, as it includes taxes and other fees still owed.
As an example, if your car’s value averages out to $13,000 and your loan payoff is $15,000, you have $2,000 in negative equity. In other words, you owe more than your car is worth and are in an upside-down loan.
How to Get Rid of a Car with Negative Equity
While being in an underwater loan isn’t ideal, it’s not the end of the world. Here are your options if you’re looking to get into a different vehicle:
1. Pay down the existing negative equity.
If you have some extra cash, use it to pay off the negative equity. Doing so gets yourself out of debt and above water so your next car won’t feel like such a burden.
2. Sell the car personally.
The Internet makes it easy to sell a car from the comfort of your couch. By selling it yourself, you can make more than you would by selling it or trading it in to a car dealership.
Ask people you know if they’re in the market for a car. Post it on Facebook. Head over to Craigslist and list it, or use a site like Cars.com or Autotrader. All are solid options to try before losing potential money on a sale via unloading it at a dealership.
3. Trade in the car.
If there are no buyers for your car, you may want to trade it in. When you do, any amount you owe in negative equity will be tacked on to your new loan.
While this may seem like a quick fix, it comes with problems of its own. The dealership could charge a fee for making the move, your new loan could be larger than you’d like, or you could pay a higher interest rate. In short, you could trade an old financial trouble for a new one.
How can you combat these issues to make a negative equity trade-in less troublesome? You could downgrade to a car that isn’t as expensive. You could also shop around for a pre-approved car loan that carries a lower interest rate than what the dealership can offer. Lastly, shortening the term of your new loan could result in lower interest, although your monthly payment will be higher.
Depending on what car you choose, you could get a boost from a cash-back offer. If the discount is significant enough, you could use it to pay down your old loan’s negative equity.
Another option is to go from owning to leasing. Your lease payments will be higher from adding negative equity into the equation. However, you won’t get into a brand new loan that is likely underwater from the start due to your past loan’s negative equity.