Negative Equity Car Loan
A negative equity auto loan occurs when your loan exceeds the car’s total value. A car buyer with such a loan ends up overpaying for a car and makes a loss after selling it. How does a buyer end up with an upside-down loan? People who run into serious financial difficulties after taking no money down car loans. Why? It’s because the accumulating interest rate becomes higher than the rate of debt repayment.
An underwater car loan is bad for your finances because cars don’t appreciate in value. On top of paying excess money, you cannot sell the motor vehicle at a price that enables you to recover what you overpaid. This situation brings about frustration and leads to a buyer feeling less attached to their cars.
1. How to buy a car with an upside down loan
The good news is that you’ll find car dealerships and credit lenders willing to provide financing despite your situation. How does this work? Your new creditor can negotiate for a rollover to help you get a new car as soon as possible. On the other hand, you might come across a credit lender who provides you with a high-interest car loan after clearing your outstanding balance.
Is this a wise move? It poses a great risk because you’ll pay higher installments than your previous auto loan. Acquiring a new car loan does not relieve you from your underwater payments. Your new repayment plan will consist of two different auto loans and that makes it expensive.
In addition, some creditors silently include your outstanding car loan balance to the principle of your new car. If you need financing for a car worth $18,000 but you had an outstanding balance of $3,000, a dishonest credit lender adjusts your principle to $21,000 without your knowledge.
Does trading in your car affect your credit score? Your credit score remains intact due to two reasons. Your new creditor will clear the outstanding debt before financing your new car. Alternatively, they can roll over your upside down car loan to ensure your previous creditor still receives their monthly payments.
2. What are the risks involved in trading in your car?
If you’ve just come out of debt, the last thing you want is getting an expensive loan. Buying a car when you still have an underwater auto loan forces increases your car monthly payments significantly. These high payments can overwhelm you if you already have other debts to pay. You’ll also need higher monthly income to pay your new installments on time.
There’s also a high likelihood of getting another negative equity car loan. Why? Because the buyer will request for a longer repayment period to lower monthly installments. In this situation, your rate of equity build-up is lower than the rate of depreciation.
If you had a bad credit auto loan that went underwater and then traded in your car, you’ll find refinancing to be expensive. The combined auto loan payments and high interest associated with bad credit loans water down the effects of refinancing.
3. Should I buy a new or used car?
A new car comes in excellent condition and this gives you value for money. You won’t need to do any repairs or replacements using your own money because new cars come with auto manufacturers’ warranties. You can drive the car for a longer duration compared to a used one.
While buying a new car seems appealing, you also need to look at the downside. New cars rapidly depreciate after the first three years of release. The auto loan can turn negative if the car buyer paid a minimal deposit then chose a very long repayment period. Another setback is car dealerships charge costly GAP insurance for new cars. The Guaranteed Auto Protection Insurance lowers the effect of default because it’s the gap between your car’s real value and the outstanding auto loan balance.
Is it better to buy a used car then? Yes, it is because used cars have lower rates of depreciation. That means you pay affordable GAP insurance monthly payments. Since used cars are more affordable, you’ll be able to reduce monthly payments by paying a high down payment.
4. Can I refinance a negative equity car loan?
Applying for refinancing is one way of getting out of a negative car loan. If you choose to continue paying your current auto loan, refinancing enables you to lower car monthly payments. Your creditor provides a new interest rate and allows you to choose longer repayment periods.
If the difference between your auto loan and car’s value is just a couple of thousand, consider applying for refinancing. You’ll reduce the auto loan to where it’s almost equal to your car’s value. Are you planning to use your car for a long time? Refinancing your car loan will lower your installments so that you can retain your vehicle for a longer period.
Before refinancing, ensure you repay at least half of your current auto loan. Doing this helps you to get affordable car payments by lowering the principle of your new debt. Choose a short repayment period to help you build up equity faster than the car’s rate of depreciation.
4 car refinancing tips
• Repay at least half of your outstanding balance
Car refinancing is all about reducing your financial burden. Since this is another form of a car loan, you want to pay the least amount of interest charges. How do you achieve this? By paying at least half of your current negative auto loan balance.
How does this help you? First, you have a small principle and this enables you to choose short repayment periods. Lowering your principle has a direct effect on your new monthly installments because it makes them more affordable.
• Choose short repayment periods
Why should you choose a short repayment period? It helps you to get out of debt fast. Interest charges go hand in hand with a loan’s repayment period. Buyers who choose repayment periods beyond 36 months pay more interest charges because each installment contains a portion of interest.
In this situation, choosing a short repayment period ensures that the rate of car depreciation doesn’t affect you. Paying high installments helps you to build up equity at a higher rate.
• Overpay your monthly installments
When you borrow a loan then overpay for it, the excess amount gets rolled over to your next loan. Doing this lowers the amount of interest you’re supposed to pay. It also reduces your financial burden gradually because you pay fewer amounts as the repayment period draws closer to a finish.
Consider overpaying each installment by $200 dollars and you’ll see how easy it is to pay future car loan installments.
• Make your car payments on time
Late and skipped payments attract fines. If you let these fines roll over, your refinancing payments increase. Since you’re already facing a strain with your upside down car loan, make sure you pay your monthly refinancing installments on time.
5. Can I sell a car that has negative equity?
You can sell your motor vehicle if you need another car or want to get out of an underwater auto loan. The law allows you to sell to car dealerships or private buyers. There’s a difference between doing a trade-in and selling a car to a dealership. In this case, car dealerships use a negative equity car loan calculator to determine their offer. Selling doesn’t grant you financing for your next car purchase.
Does this mean that your new seller takes over your outstanding balance? No. Selling your car only transfers ownership of the asset. You still retain the responsibility of clearing your negative equity car loan.
6. Are there advantages of selling a car with an underwater loan?
- Helps you to get out of debt fast because you clear the outstanding balance using money obtained by selling your car.
- It helps you to avoid rolling over your debt to a subsequent car loan. Doing this helps you to avoid costly monthly payments.
- You get better offers for your car compared to trade-in deals.
- It’s suitable where refinancing cannot lower your car monthly payments to your desired amount.
7. What are the disadvantages of selling a car with negative equity?
- It might take a long time to find a willing buyer who will wait for you to first pay off your auto loan in order to receive the car title. Some potential buyers might think the sale is illegal and lose interest in the deal.
- You still have to pay monthly installments during the period your car is on sale. If you told your creditor about selling the car and the next payment date for your next installment reaches, you still have to pay. If it takes two months to find a buyer, you’ll have to make these car payments on time.
- Desperation can force you to settle for a lower offer than your initial price. Imagine waiting for a willing buyer for three months and having to pay expensive car installments at the same time. You may decide to drop your car price or reach out to a previous customer who asked for a lower price.
8. 8 ways of getting out of an upside down car loan
1. Borrow a credit union loan
If you’re planning to weather the storm and still retain your beloved car, you can offset your negative equity car loan by borrowing low-interest credit. Why do you need a loan? Because it helps you to get out of debt faster through lump sum payments. That’s where a credit union comes in.
Credit unions offer emergency loans at friendly interest rates and repayment periods. The more money you save, the higher your loan limit. You can actually borrow several credit loans over the course of your repayment period. This helps you to choose a short repayment period to lower the interest charges you pay your credit lender.
2. Sell items to raise cash
Do you need enough money to pay off your loan in one payment? Perhaps you’ll have to sell some idle assets to raise a significant amount of money within a short time. This also applies if you have a small outstanding balance that you can manage within a repayment period of 12 months.
If you have a plot of land that you aren’t planning to develop in the near future, sell it to get out of debt. Perhaps you have a large investment portfolio of company stocks and you really need the money fast. Get in touch with your investment adviser to find out how you can sell some stocks and rebuild your portfolio fast.
3. Reach out for financial help
Life can throw you curve balls when you least expect it. You might be facing financial challenges because clients keep postponing payments and you’ve depleted your savings. In this situation, it’s hard to borrow a bank or credit union loan because there’s no proof of income.
Rather than suffer in silence you can avoid losing your car by reaching out to family and friends. There’s no shame in borrowing money when you really need it to prevent car repossession. If they understand your problems, they won’t rush you to pay the debts until you get back on your feet.
4. Avoid borrowing high-interest loans during the repayment period
You need to retain a huge portion of your net income in order to make car payments consistently. One way of doing this is by avoiding debts with high interest rates. You don’t want to fall behind on an overpriced auto loan because you have other costly debts to keep up with.
During your repayment period, get a debit card to avoid interest charges that come with credit card expenses. You’ll reduce your monthly expenses by at least 25-30% and have enough money to either increase your monthly car payment or save for a lump sum. Avoid borrowing payday loans because the high APR and very short repayment periods will strain your monthly income.
5. Postpone less urgent events
Defaulting on your car loan attracts several consequences. It ruins your credit score and that makes it hard to get affordable interest rates on future car loans. A stained credit history also discourages potential credit lenders from approving your loan applications. Last but not least, car repossession is a humiliating experience.
If you don’t want to experience these consequences, you’ll have to use your annual vacation’s savings to clear your upside down car loan. After getting out of debt, you’ll have enough net income to restore your vacation’s savings and even increase the amount you set aside every month.
6. Consider debt consolidation
You can get the right financial assistance from a debt consolidation company if you feel strained paying several debts every month. Though unpopular, this method will help you retain your car and reduce your monthly installments.
Debt consolidation is whereby an attorney or certified credit officer structures all your recurring debt payments into one installment. He or she negotiates with your creditors for new repayment terms to help you get lower installments than the initial arrangements. You’ll pay more in interest charges because increasing your repayment period means spreading the interest rate over a longer duration.
7. Debt settlement
Car buyers who have too many liabilities resort to this method to avoid bankruptcy. Debt settlement is whereby an attorney or credit officer meets your creditors to convince them to write off your outstanding debts for lower amounts. Doing this affects the payment history of your underwater car loan.
In order to apply for debt settlement, your outstanding balance should meet a minimum amount. This amount ranges from $10,000-$15,000 depending on where you reside. Debt settlement can lower your outstanding car loan balance by up to 30%. However, your credit score takes a huge dip due to incomplete payments.
8. Voluntary surrender
Just like debt settlement, a voluntary surrender should be your last resort. It affects your credit score and chances of getting car loans in future. It’s also very costly because you walk away with nothing.
A voluntary surrender is whereby a car buyer returns his or her car to the credit lender due to inability to make payments consistently. People do this to avoid car repossession. However, a voluntary surrender remains visible on a credit report for seven years.
9. Are you about to buy a car? These tips will help you avoid an underwater car loan
1. Check the value of the car before buying
Buying an overpriced car fixes you in a bad financial position from the start because your car starts to depreciate as soon as you drive it home. You’ll also run into issues with your auto insurance companies when filing for compensation.
Before signing any papers, check the value on Kelleys Blue Book. This free website provides an accurate valuation based on current prices in the U.S market. During the weekend, you can visit several local car dealerships to check the prices of the car you want. Gathering first-hand information enables you to know the true value.
2. Pay a huge deposit
Why should you prepare a hefty down payment? Because it helps you to gain major equity so that depreciation doesn’t affect your car loan. For example, you want a car worth $30,000 and the creditor is willing to offer you a car loan worth $20,000. If you pay a deposit of $15,000, your outstanding balance is $15,000.
New cars depreciate by 20% in value in the first year. So, you expect your car’s value to drop to $24,000. However, since you paid $15,000 instead of $10,000, your creditor determines your payments using $15,000 as the principal amount. How did we arrive at $15,000? Because it’s the difference between the car’s price ($30,000) and your down payment of $15,000.
Reducing the loan principal to $15,000 enables you to have a gap of $9,000 between the car’s value after one year and the principle. If you choose a 24-month repayment period, you’ll avoid getting into a negative equity auto loan.
3. Sell your current car instead of rolling it over to a new car
The car market has such a high demand that even some car dealerships offer to sell you cars even when you still have a pending auto loan. How does this work? A car dealership allows the buyer to trade in their motor vehicle then includes the previous balance to the new auto loan.
This is a disadvantage because your loan’s principle increases. Let’s assume you have an outstanding balance of $8,000 and you find a car dealership willing to trade in your car for a new one plus financing worth $10,000. If you apply for this loan and succeed, then your loan principle increases to $18,000.
A higher principle means paying hefty car payments every month. If you didn’t expect this situation, then you’ll run into financial strains.
4. Get a co-buyer
Are you finding it hard to raise a large cash deposit for your car purchase? You might need help by getting a willing co-buyer. He or she contributes a portion of your car payments as well as insurance. Co-buyers are important when applying for bad credit car loans because combined financial effort helps you to lower costly installments.
- Self Employed Car Loans With Easy Approval
- First Time Car Buyer Loans Without a Cosigner
- Common Auto Loan Eligibility Requirements
A co-buyer needs to have a good credit score, stable source of income and permanent physical address.
10. Apply these tips today!
Prevention is always better than cure. The first step to avoiding negative equity car loans is checking the real car value rather than assuming your dealer’s price tag is true. Pay off your current auto loan rather than rolling it over and end up paying costly car payments.
You can get out of this type of car loan fast by paying it in lump sums. Avoid increasing the repayment period because the depreciation rate works against you. Complete Auto Loans has a team of highly experienced auto loan experts who are willing to offer you personal help in dealing with a negative equity car loan.
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