What to Do When You Owe More Than the Car Is Worth

by 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.

About the Author

Keith Evans has been writing professionally since 1994 and now works from his office outside of Orlando. He has written for various print and online publications and wrote the book, "Appearances: The Art of Class." Evans holds a Bachelor of Arts in organizational communication from Rollins College and is pursuing a Master of Business Administration in strategic leadership from Andrew Jackson University.

Photo Credits

  • photo_camera evp82/iStock/Getty Images