To calculate negative equity, subtract the asset's current market value from your remaining loan balance; if the loan balance is higher, the difference is your negative equity (e.g., owing $20k on a $15k car means $5k negative equity). You need two figures: your payoff amount (from your lender) and the current worth (using online tools like Kelley Blue Book for cars or market data for homes).
If your loan payoff amount exceeds your car's current value, then you have negative equity on your car loan. For example, if your loan payoff amount is $10,000 and your car is only valued at $7,000, you have $3,000 in negative equity on the car loan.
Research the estimated value of your current vehicle and compare it to the amount you owe. For example, if your car is worth $15,000 and you still owe $20,000, you have $5,000 of negative equity.
To figure out if your home is in negative equity, start by determining the current market value of your property. Then, check your latest mortgage statement to find your remaining balance. Subtract it from your home's value, and that, roughly, is the amount of equity you possess.
Equity is the value of your property that you own outright. Negative equity is when the value is less than the mortgage outstanding on the property. This is normally the result of falling house prices and could be in your area or across the country.
Dealing with Negative Equity
Wait to buy another car until you have positive equity in the one you're still paying for. For example, consider paying down your loan faster by making additional, principal-only payments. Sell your car yourself. You might get more for it than what a dealer says it's worth.
For years, dealerships have been using a tactic called a “four square”—a sheet of paper divided into four boxes where the salesperson will write down your trade value, the purchase price of the vehicle you're buying, your down payment, and your monthly payment.
The FTC Red Flags Rule requires auto dealerships to have a written Identity Theft Prevention Program (ITPP) to detect, prevent, and mitigate identity theft, especially in financing/leasing, by spotting signs like suspicious documents (altered IDs, mismatched photos), inconsistent application info, or unusual account activity, with consequences for non-compliance including hefty FTC penalties and lawsuits, notes the Federal Trade Commission. Key steps involve identifying vulnerable accounts, spotting specific "red flags," creating detection/response plans, training staff, and regular audits, with a senior manager overseeing the whole program, say Dealertrack and Total Dealer Compliance.
To get rid of a $20k negative equity car, you can sell it privately (best value), pay down the loan faster, refinance for better terms, or trade it in by paying the difference or rolling it into a new, less expensive car (use caution with rollover). Options like voluntary repossession or letting it get repossessed are damaging, while leasing might offer an escape route at term end.
Attempting to hide negative equity is a form of auto fraud. The dealer may show on the contract of purchase that the amount of payoff is the same as the trade-in value, but then increases the purchase price to cover the negative equity.
You'll save money.
Unless your loan has precomputed interest (more on that below), extra principal payments can help reduce the total amount of interest you'll pay.
The 50/30/20 rule is a simple budget guideline: 50% of your after-tax income for needs (like housing, groceries, and car payments/expenses), 30% for wants (dining out, entertainment), and 20% for savings and debt repayment. For a car payment, this means your total monthly car expenses (loan, insurance, gas, maintenance) should ideally fit within the 50% "Needs" category, with some experts suggesting car costs shouldn't exceed 10-15% of your income overall, making a modest car a "need" and luxury vehicles a "want".
Dave Ramsey's core car rules emphasize paying cash, avoiding new cars (unless you're a millionaire), keeping your total vehicle value under half your annual income, and using a strict budget, often suggesting the 20/4/10 rule (20% down, 4-year loan, 10% total car expenses) as a guideline if financing, but preferring no debt at all to avoid depreciating assets trapping you. He stresses buying reliable, used vehicles to prevent debt and build wealth.
Let's look at some things to keep under your hat while you explore the lot.
5 Tips on How to Beat the Car Salesman
A negative equity lease can be appealing because lease payments are often lower. But, rolling $20,000 into a lease means you'll pay for it without building ownership. Use a lease calculator to understand your costs. Kia vehicles are good for negative equity situations.
From waiting it out to outright selling your car, here are five strategies that could help you get right side up again.
You generally need a credit score of at least 620 to qualify for a conventional mortgage, though every lender is different. FHA loans, which are backed by the federal government, may be an option for individuals with credit scores as low as 500.