How to get rid of a car with negative equity 

By Sarah R
Modified on April 24, 2023
how to get rid of car with negative equity

How much negative equity is in your car depends on a few different factors: 

  • How much your vehicle is currently worth in Kelley Blue Book. 
  • What kinds of add-ons you have that may increase the estimated value of your car. 
  • How much you currently owe to pay off your vehicle. 
  • How many car loans you have

Here, you will learn more about equity, upside-down loans, and how to get rid of a car with negative equity! 

What Is Equity?

Equity refers to the value of a piece of property, like land or a vehicle. A person may own something with positive equity if the market value is currently worth more than what the owner paid. Alternatively, a person may also own something with negative equity if the market value is currently worth less than what the owner paid. 

You can calculate negative equity in your car by comparing the price of the vehicle with how much you currently owe on your auto loan. For example, if your vehicle is worth $25,000, but your auto loan is $35,000, the negative equity in your vehicle is approximately $10,000. 

What Is an Upside Down Car Loan?

Upside-down loans are simply an alternative term for negative equity loans. If you have an upside-down loan, that means you owe more money that whatever the initial loan was used to purchase.  

How Can You End up With Negative Equity on a Car? 

You can end up with negative equity on a car because of:

  • Getting a bad loan deal. 
  • Initial costs that cause a sudden spike in your car Loan balance
  • A payback schedule that is too long. 
  • Getting talked into custom add-ons you don’t really want. 
  • Inconvenient interest rates. 

Not Getting the Best Deal

Jumping into a car loan contract without shopping around or doing research first may leave you with an expensive car or an unmanageable payback schedule. If your car debt accumulates quicker than you can pay off your loan, you may find yourself with an upside-down car loan. 

To ensure you get the best car loan deal, shop around at several dealerships before committing to any one place or vehicle. That way, you can get a good idea of what is available in your area for your personal financial situation. 

Deceptive No Money-down Car Loans

Purchasing a car with no money-down may seem like a fantastic deal. You get to drive away with a new-to-you vehicle without paying a dollar! However, these payments can creep up on you later and make your car loan seem incredibly daunting. Also, if your car depreciates in value significantly, you may end up with a negative equity loan from the start! 

Long-term Payback Schedule

Long-term car loans often end up being negative equity loans. The longer it takes to pay off your loan, the more likely you are to acquire negative equity. 

Unnecessary Add-ons

Add-ons like a sunroof, upgraded stereo system, and more can tack on hundreds or thousands of dollars onto your auto loan. Walk into your car purchase knowing what you want, so you don’t let a slick salesman talk you into add-ons you don’t want. 

High-interest Rates

Interest is one of the most pivotal aspects of a loan. Your car loan’s interest rate can dictate how long it takes to pay off your loan and how much you end up paying overall. Excessively high-interest rates can cause a regular auto loan to become a negative equity loan in just a few years. Other loans that can come with extremely high-interest rates are: 

What Is Voluntary Surrender?

Voluntary surrender is a last resort option involving a car owner opting to give up their vehicle to their lender because they cannot pay back their car loan. While voluntary surrender is a better option than having your vehicle repossessed, it may, unfortunately, have a detrimental effect on your credit score. Voluntary surrender will significantly affect your credit scores for years and may hinder your ability to find approval on car loans in the future

Is It Possible To Get Rid of Negative Equity on a Car? 

Yes! There are a few ways to get rid of a car with negative equity. 

Receive Assistance From a Mechanic or Body Shop

If your car has negative equity due to simple mechanic or cosmetic issues, see if you can fix those problems. To save money on labor, you may ask a friend or family member who knows about cars to help you out with the work you need to be done. There are also informative videos online you can take advantage of to learn how to do simple car maintenance on your own. 

Sell Your Vehicle 

Trading in your car is another way to get rid of a vehicle with negative equity. You may trade in your car with the dealership you originally purchased the vehicle from if they buy used cars. Keep in mind that you may not get much money, if any, from the dealership if your car has a significant amount of negative equity. 

Also, you may not sell your vehicle privately if you are still paying it off. If you want to sell a car you owe money on, you must find a buyer willing to cover the cost of what you still owe. 

How To Get Out of a Negative Equity Car Loan 

The only way to get out of a negative equity car loan is to pay off the original lender. However, this process doesn’t have to be as difficult as it may seem. 

Refinance Your Auto Loan

Perhaps the fastest way to get out of a negative equity car loan would be to refinance with a new loan. When you refinance auto loans, a lender will take your existing car loan and refinance it into a brand new car loan. You may choose to refinance your old loan with the same lender or do some research and find a new lender. 

By refinancing and getting a new car loan, you may enjoy perks like: 

  • Lower interest rate. 
  • More manageable payback terms.
  • Possible debt consolidation with other loans or expenses. 

Continue Making Payments

To avoid account delinquency, staying on top of your car loan payments is vital. Even if your current loan is a negative equity car loan, you are much better off making regular monthly payments than you would be ignoring the loan while you search for a better deal. 

To make things easier, you may opt for autopay. That way, you can rest assured knowing that you will never have a late or missed payment. Just make sure there are sufficient funds in your checking account! 

Make Extra Payments When You Can

Pay off your car faster by making extra or additional payments when you can. When you pay extra on your monthly payment regularly, you will reduce the interest charges and costs you will have to pay over the life of your car loan. 

In addition to, or as an alternative to paying extra, you can make additional installments on your loan in-between payments. By making extra payments, you can reduce the amount of time it will take to pay off your loan by months or even years! 

Tips for Avoiding a Negative Equity, or Upside Down Car Loan

Set yourself up for success and avoid accruing negative equity on your vehicle from the start. Check out some helpful tips below that may help you avoid getting stuck with a negative equity car loan. 

Pay Taxes and Fees Upfront

Instead of putting them off, pay any taxes or fees associated with your auto loan right away. Paying off those fees in one fell swoop at the beginning of your loan term means you don’t have to worry about them later. Paying fees and taxes early may even help you save on interest charges down the road. 

Some fees you may find with a car loan are: 

  • Dealership fees.
  • Origination fees.
  • Certain taxes. 

Make a Down Payment of at Least 20% Of the Vehicle’s Worth

Cars lose approximately 20% of their value as soon as your drive away from the car lot. To avoid being hurt by this immediate depreciation, try to make a down payment of at least 20% of your car’s Kelley Blue Book price.

If you can’t swing a full 20% down payment, pay whatever you can. While a no-money-down deal may seem appealing on an auto loan, you most likely will end up paying extra over time. 

Plan Your Payback Schedule

Opt for the shortest loan term you are able to afford. The longer you take to pay off your car, the more you will end up paying, and the more likely you will fall into a negative equity car loan. Take a look at the different loan terms available. Then, choose the shortest loan term possible that results in a monthly car payment you can easily afford. It may be a good idea to aim for a monthly payment amount that is slightly less than the maximum payment you can afford. That way, you have some breathing room if your finances or monthly budget changes. 

Take Your Car in for Regular Maintenance

Regular maintenance is essential when you want to avoid drastic depreciation in the value of your car. Minor problems like low oil or a slightly deflated tire can lead to major and more expensive problems if not addressed promptly. If you notice something looks or sounds off with your car, take it to a mechanic right away. Even if you don’t notice anything, it is best to take your vehicle in for a check-in/tune-up at least every six months or so. 

Leasing vs. Buying

Before you sign your auto loan contract and purchase your vehicle, consider how often you will be driving. If you don’t drive your car often, you may be better off leasing your vehicle rather than buying it outright. There are even options where you can lease to own your vehicle if you think purchasing a car is something you may want to do in the future. 

How to Get Out of an Upside Down Car Loan & How to Avoid

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