Top Tips on How to Get Out of a Car Loan with Negative Equity

Upside down or negative equity: whichever term you decide to go with, they’ll still have the same meaning. That is, owing more money on a certain asset than what the asset is worth.

If you have negative equity on a car loan, it can be quite frustrating because cars don’t appreciate in value as houses do. You might think of your car as an asset, but in reality, it’s a liability.

If you find yourself in this situation, don’t worry, there are a few options available to help you get out of an upside-down car loan. However, the wisest of them all is to consider your budget.

Look at these four steps you can use to get yourself out of this unfortunate situation.

1. Find Your Negative Equity

Start by finding out how far under you are in negative equity. To find out the exact number, deduct your car’s estimated value from the loan balance you have on the car. If you aren’t sure of your car’s worth, you can check the resources recommended by the Federal Trade Commission:

· Edmunds

· National Automobile Dealers Association Guides

· Kelley Blue Book

These resources contain varying car valuations. For this reason, it is best for you to compare at least three resources to get a clearer picture of your car’s worth.

For example, if you find after your research that the car’s market value is about $10,000 and you still have about $15,000 left on your loan, then you have a negative equity of $5,000. 

With this information, you can analyze your financial situation before going ahead with plans of refinancing or selling the car. If your finances allow you to pay off the loan in a single payment without taking out another loan or putting any assets on the line, then this is your best bet.

2. Contact Your Lender

If you don’t have enough money to pay off the negative equity in a single payment, you can still opt for other alternatives. Contacting your lender is the next option.

Get in touch with your lender and explain your situation. Find out whether they have a solution to your negative equity problem. They might not be able to help you out, but you don’t have anything to lose.

If you have enough money to pay more toward the principal every month, then ask the lender to get on board with this option. By paying more toward the principal, you can clear the car repair loan faster which will, in turn, allow you to pay off the car’s balance faster to beat the devaluation.

You’ll still have negative equity to deal with, but at least you’ll have your car and no loan which will still be a win. Furthermore, despite the short-term pain, you’ll have some equity to leverage in the future when you’re shopping for a new car.

3. Take Out Another Loan

Reasoning with your lender might prove to be a difficult task, either because they are unable or unwilling to help you out. If this is the case, then you might want to think about refinancing the car loan at a reduced interest rate.

The main question people ask at this point is, “What is a good credit score?”

In general, if you have a credit score above 700, then this is a good score. However, different lenders have varying credit requirements, so the best way to find out is by doing some research.

The main aim of refinancing any loan is to get lower interest rates. For this reason, it’s crucial for you to shop around to find the best loan terms possible. Often, many borrowers get lured into low monthly installments, but this is only good on paper. You’ll have to stick with the loan for a longer period which means paying more and thus increasing your negative equity.

Among the valuables that lose value fast are cars. In the first year, a car will lose at least 20 percent of its value and after five years, it will have lost between 50 and 60 percent of its value. This means you have to pay off the loan as fast as possible to avoid going underwater again.

4. Sell Your Car

If you have a car loan with negative equity, it is best to hold off any plans of acquiring a new car and stay with what you have instead. Edmunds recommends this. However, if you keep coming across dead ends on all other avenues, then it is time to sell your car.

Selling your car might not be pleasing but try and make sure you sell it at the highest possible price. This will allow you to clear off a huge portion of the loan balance.

To get the best offers, you may want to make some improvements to the car. This includes making mechanical improvements and detailing it, but if you’re on a tight budget, waxing and cleaning the car will do fine.

While you might be pressed for time, don’t get tempted to trade your car for brand-new wheels. This is because trade-ins offer much less compared to private listings.

On top of that, you have to keep in mind that you have a loan balance. This amount will be carried to the new car loan, thus increasing your risk of going upside down again.

Online resources provide the best means of saving money for private sellers. What’s more, you get to reach a bigger audience. You can also cast your net wider using your private networks and advertising on free sites such as Craigslist.

If a private sale doesn’t work for you, you might want to factor the possibility of leasing the car with a loan balance. This balance will be incorporated into the lease. Leasing might not be the best option, but at least you’ll forget about the issues associated with resales because the car will end up at the dealership after the lease expires.

In both scenarios, however, you’ll still have to bear the responsibility of paying off the negative equity. 

Be Patient and Weigh Your Options

Getting out of an upside-down car loan can be quite frustrating, to say the least. Therefore, it’s important for you to keep your head straight to avoid impulsive decisions when trying to escape a car loan. 

Instead of running after a quick solution which might be costly, analyze all your options to find a repayment method that suits you. This could mean getting in touch with your lender to ask for a refinancing option. You can also decide to pay off the negative equity in a single payment.

Whatever method you choose, you have to understand the bottom line in order to get yourself out of an underwater loan.

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