What to Do When You're Underwater on Your Car Loan

What to Do When You’re Underwater on Your Car Loan

So, you’re underwater on your car loan. Is it really such a bad thing? If you’re not thinking about trading in your vehicle, you may not think twice about having negative equity. But you should. There are, however, several ways to flip your equity situation – meaning you don’t have to stay upside down nearly as long.

Why Care About Negative Equity?

If you have negative equity – also called being upside down or underwater – it simply means that you owe more on your car loan than the vehicle is worth. Typically, this only becomes a problem when you want to trade your car in or sell it. In these cases, having negative equity means you’re still going to owe the lender, even if you do sell your vehicle.

But, there’s another reason not to remain upside down that many people often overlook: the possibility of losing your car due to an accident. If your vehicle is totaled, insurance only pays the value of the car, so you’re still responsible for paying any loan balance. This is one reason why it’s always a good idea to have GAP insurance when financing a vehicle.

Options for Getting Out of Negative Equity

Generally, you want to begin the car loan process by getting a good deal from the get go. Pay careful attention to your contract and be sure you’re not agreeing to anything that’s driving up the cost of your vehicle unnecessarily. Things like expensive add-ons, excessive documentation fees, and expensive trim packages can all increase the cost and lead to starting out more upside down than necessary.

One of the best ways to combat negative equity from the start is to use a down payment of at least 20 percent of the car’s selling price. This way, you aren’t financing as much, and you increase the chances of paying off your loan before your vehicle loses too much value. But, assuming you’re already in a negative equity situation, there’s still another option.

In this case, you should pay more than the minimum loan payment each month. Since most car loans are simple interest, there should be no pre-payment penalties, so you can overcome being upside down by paying more every month (the more, the better). Vehicles experience their steepest depreciation during the first year of ownership, then the rate begins to slow. So, making a larger payment than required can help you overcome negative equity more quickly. You also end up paying your car off faster, which saves you in interest charges.

Options to Trade in a Car with Negative Equity

If you’re upside down, it’s a good idea to stick with your current loan until there’s equity in your vehicle. If you can’t wait that long, you can trade in a car that’s underwater. The important thing to know is that you’re probably going to have to make up the difference between the value of the vehicle and your loan payoff amount out of pocket.

In some cases, a lender might allow you to roll some or all of the negative equity into a new loan, but be careful if you do. Adding it to a new loan increases the amount financed, which means you have higher payments and end up paying more in interest charges over the loan term.

At Trade-in Time

If you’re looking for a dealer to take your trade-in, but are worried your credit is going to stand in the way of getting financed, don’t fret. Let SLG Progressive + Commercial Insurance Agency help you find a local dealership that has the lenders to help.

We work with a large network of special finance dealers from coast to coast that have lenders available that work with people in many types of credit situations. So, don’t hesitate any longer. Simply fill out our online auto loan request form, and we’ll get to work matching you with a dealership today!

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