What to Do When You Owe More Than the Car Is Worthby Keith Evans
Many vehicles depreciate very quickly, which can leave those who financed their cars owing more than the vehicle is worth. The payoff balance of the loan exceeds the value of the vehicle. This condition, commonly known as being “upside down” on the loan, can lead to difficulty for those who want to sell or trade the vehicle. Though getting out of that situation can be tricky, there are options available.
Roll Negative Equity Into a New Loan
If you trade your car toward the purchase of a new or used vehicle at a dealership, many dealers will handle loan payoff as part of the purchase process. If you lease or finance the vehicle you purchase, the dealer will add the negative equity to your lease or loan balance. This rollover will result in higher payments. Because auto lenders use the value of the financed vehicle to secure the loan, some lenders may be unwilling to finance the entire balance if the negative equity causes the loan amount to significantly exceed the value of the purchased vehicle.
Sell the Car Privately
Though dealerships make the trade and payoff processes easy, dealer trade-in values typically are lower than the price you get by selling the vehicle yourself, sometimes by thousands of dollars. It may be necessary to set up an escrow account to hold the payment until the buyer receives the title. If the financial institution that holds the title to your vehicle has a local branch, you may be able to conduct the sales transaction at the branch so the buyer receives the title right away. Be sure to check with your financial institution to verify payoff details and confirm the sales process.
Pay Down the Loan
You can help offset the negative equity in your car by making additional payments toward the principal balance. When you pay more than the minimum payment amount, your lender will credit the additional funds to the balance of your loan and decrease negative equity. Making additional payments for several months can significantly decrease your car’s negative equity, making it easier to trade or sell the vehicle.
Keep the Car
If you have significant negative equity and cannot sell or trade the car, you may have no other option than to keep the car and continue making payments. Continuing to make payments will pay down the loan balance and decrease negative equity. After some time, you will no longer be upside down on the loan and will be able to sell or trade your car at your convenience.
- link Kelley Blue Book: Upside-Down on a Loan?
- link Money Crashers: How to Get Out of an Upside Down Car Loan with Negative Equity
- link Edmunds: Upside Down and Under Water on a Car Loan
- link Cars Direct: How to Sell Your Car When You Still Owe Money on it
- link Experian: Voluntary Repossession Would Have Seriously Damaged Credit Scores
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