How to deal with negative equity in a car loan.
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Your car loan is upside down if you owe more than the car is worth. This is called “negative equity” and is a position many vehicle buyers find themselves in. In fact, USA Today found that 32% of vehicles brought for trade-in and still under financing have negative equity. Here is a look at what causes negative equity and five ways you can deal with this debt dilemma.
How Do You End Up Upside Down On Your Car Loan?
If you financed a new car with little or no down payment, the car loses 20% of its value the moment you drive it off the lot. That means you start out owing more than the asset is worth. The main causes of negative equity in a car are:
- Not doing your homework: If you don’t comparison shop for your car price and your loan, you could wind up getting a bad deal that will cost you big bucks in the long run.
- Not putting money down: Because of the 20% drive-off depreciation, unless you get a bargain basement deal or put down at least 20%, you will be upside down from the start.
- Not refusing the extras: Car dealers love to sell you costly upsells—like an upgraded sound system, leather seats, or a sunroof—that can drive up the price of your car.
- Not paying off one loan before you take another: Many dealers offer to let you get a new car and roll the old loan into the new one. That means you can go into the loan far worse off than before.
So, what steps can you take to deal with an upside down car loan?
#1 Keep It and Deal With the Negative Equity Until the Loan Ends
The first option is to just suck it up and keep paying the loan. If you take good care of the vehicle, eventually you should wind up with some equity. Once you pay off the loan, you can be wiser with your next purchase.
#2 Refinance With a Down Payment
Another option is to save up some cash and put it down as a deposit on a refinance deal, hopefully with a better interest rate. This could get you into a position of break-even or positive equity, so your financial situation should only improve from there.
#3 Sell the Car and Pay Off the Negative Equity Balance
If you want to get rid of the car because you can’t afford the loan and have other transportation options, you can sell the vehicle and pay off the negative equity balance. You might have to save up or borrow from a lender or other source, but the loan will be gone.
#4 File Bankruptcy and Negotiate to Keep the Car
Chapter 13 bankruptcy offers you the option to cram down your car loan balance to market value if you owned it for a while and get a better interest rate. Chapter 7 bankruptcy also allows you to pay off the loan balance at market rate, but it must be a lump sum. Either method can allow you to eliminate debt on your car loan.
#5 File Bankruptcy and Surrender the Car
You can use bankruptcy to surrender the vehicle to the lender and, in Chapter 7 bankruptcy, any negative balance is discharged. With Chapter 13, you surrender the car, and any leftover balance goes in with unsecured debt and will be mostly discharged.
If you’re stuck with debt you can’t afford, are living paycheck to paycheck, and are consumed by money worries, then it's time for a financial fresh start. Contact the Law Offices of John T. Orcutt for a free bankruptcy consultation today.
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