Upside down. Negative equity. No matter what you call it, it all means the same thing: you owe more on your car than it's actually worth. That's not a fun place to be, but it's not uncommon, either.
If you are hopelessly upside down on a vehicle loan, selling the car and taking out a second loan to cover the negative equity is an option. The loan or a cash lump sum will be necessary, because once you sell the car, the lender will no longer hold the title and you will have to pay what you owe.
Sell it privately
You can post the car for sale on Craigslist, eBay Facebook Marketplace and/or other sites. Ideally, you sell it for enough to wipe out your car debt, including the negative equity. If that's not possible, you'll need to come up with the difference out of pocket.
To get rid of your auto loan's negative equity, you could pay it off all at once, out of your own pocket. For example, if you owe $12,000 on your vehicle and the dealer offers $10,000 for the trade-in, you would make up the $2,000 difference to your lender.
If you have been suckered into a car loan in which you owe more money to the lender than the car you bought with the loan is worth, otherwise known as an upside down car loan, a good way to get yourself out of this hole is to refinance your upside down auto loan.
The best way to determine if the negative equity is too much is to calculate the Loan-to-Value ratio (LTV). Ideally, the loan amount should not exceed 125% of the resale value.
How much should you spend on a car? If you're taking out a personal loan to pay for your car, it's a good idea to limit your car payments to between 10% and 15% of your take-home pay. If you take home $4,000 per month, you'd want your car payment to be no more than $400 to $600.
No, you usually cannot do this. However, if you made your purchase from a dealership and want to refinance something else, they may accommodate you in the name of good business. Dealers generally aim to have you return one day when you're ready to make your next purchase, after all.
Trading in a car with negative equity can be beneficial if you can find a vehicle that is less expensive and fits into your budget. However, you need to be careful, as you could go into greater debt and more negative equity.
Trading in a Car with Positive Equity
When you trade in your car, you'll get the difference ($2,000), which represents your equity in the car. If you're financing your new car, then you can use your equity in the old one toward your down payment. That can be a way to lower the total cost of your new loan.
If your trade-in is financed and you have equity, the dealer will pay the remainder of the loan and subtract the equity from the price of the less expensive car. If the equity of your trade-in exceeds the price of the car your trading for, the dealer will cut you a check for the difference.
If your pay-off amount is more than our offer for your car, the difference is called “negative equity.” In some cases, the negative equity can be included in your financing when you buy a car from CarMax. If not, we'll calculate the difference between your pay-off and our offer to you and you can pay CarMax directly.
You can sell your car to a dealership even if it's on finance from another dealership or lender. It doesn't matter if it's a HP or PCP agreement either, as the process for selling your car is the same for both.
If you've missed a payment on your car loan, don't panic — but do act fast. Two or three consecutive missed payments can lead to repossession, which damages your credit score. And some lenders have adopted technology to remotely disable cars after even one missed payment.
If you can't afford your car payments, you can give the vehicle back to your car loan lender. But just because you surrender the car doesn't mean that the creditor has forgiven the debt or that it has to. (If you're giving the car back under the assumption that the creditor will write the loan off, think again!)
According to experts, a car payment is too high if the car payment is more than 30% of your total income. Remember, the car payment isn't your only car expense! Make sure to consider fuel and maintenance expenses. Make sure your car payment does not exceed 15%-20% of your total income.
The result is that the car will be a lot more expensive in the end. In the example we've given, a car payment of $400 per month for five years (60 months) equates to $24,000. But the same $400 per month spread out over six years (72 months) is $28,800, while it's $33,600 over seven years (84 months).
If you're in the market for a new car, you might be asking yourself — how much is the average car payment? Experian reports that, as of the second quarter of 2020, new vehicle owners paid an average of $568 a month on their vehicles, while used car owners paid $397.
But if you're struggling to keep up with your payments, you may be wondering how to get out of the loan. There are a few options you can consider, including selling the vehicle, working with your current lender and refinancing your car loan.
A voluntary repossession will likely cause your credit score to drop by at least 100 points. This point drop is due to a couple of factors: the late payments that cause the repo and the collection account that is likely to result from it.
Contact Your Lender. Request a Deferral. Refinance Your Car Loan. Trade In or Sell Your Vehicle.
Wait until your car has positive equity.
It makes more financial sense to trade your car in after 1 year, after you've enjoyed it a bit longer. As a general rule, you should trade your car in after 2 years minimum, for a better chance at positive equity.
Edmunds data shows that in April an all-time record share of 44% of new vehicle sales with a trade-in had negative equity, compared to 40% in March and 33% in April of 2019.