Man driving car looking worried

It can be frustrating to learn you have negative equity on your car loan. Being upside down on an auto loan means your vehicle is worth less than what you owe on it. Negative equity can impact your finances going forward, unless you get back on track. Here are some options to consider.

What causes negative equity on your loan?

Depreciation is a key contributor to having negative equity in your vehicle. Your vehicle depreciates the moment you drive it off the lot, which means you’re losing value right away. Other causes of negative equity could include a high interest rate on your car loan; financing the car for too long in relation to its value at the time of purchase; or rolling extra fees and add-ons into the loan at the time of purchase.

Figure out where you stand on your loan

Restoring the equity in your loan begins with figuring out how deep underwater you are. Start by subtracting the current balance of your car loan from the current value of the car. For example, you find your car is worth $10,000 today, but you still owe $15,000 on the loan. The result: You are upside down by $5,000.

Next, contact your lender directly to get the payoff balance. That quote is typically good for a specific period of time, so you can investigate ways to improve your situation.

Use the National Automobile Dealers Association (NADA), Kelley Blue Book or Edmunds to find out your car’s value.

How do I get out of an upside-down car loan with negative equity?

One way to reduce or eliminate your negative equity is to pay down your auto loan. Look for ways to trim your budget and find extra cash. Consider small changes like eating out less, and eliminating or reducing entertainment costs such as cable and/or streaming services. If you received a raise at work or a large tax refund, consider using some of that money to make extra payments on your existing loan to help you start building equity faster.

Refinancing your car loan may be another way to help restore equity. Try to pay down your existing car loan before applying for another loan. This may net you enough money to close the gap between what your car is worth and what you owe. If you can’t, refinancing your existing loan may be an option. Or a lender may be willing to approve you for a used auto loan at a lower rate. Any one of these steps may be able to help you get to higher ground.

Avoid being upside down again

If you have a negative equity situation, consider the tips above to help turn things around. A better credit score may qualify you for more favorable rates on another vehicle. Your next ride could be a certified pre-owned vehicle or an older model year, to keep costs low.

Also, when dealers and manufacturers are eager to sell cars, they may offer generous rebates and other deals. These incentives could be enough to take a serious bite out of a new car loan. Consider if it’s better to buy or lease your next vehicle.

Lastly, it might help to wait to buy your next car until your current vehicle has been paid off.

The advice provided is for informational purposes only. Contact a financial advisor for additional guidance. 

New Auto Loan is subject to approval. APR = Annual Percentage Rate. A new vehicle is defined as current, prior or upcoming model year with 10,000 miles or less. LGFCU will finance 100% of the Manufacturer’s Suggested Retail Price (MSRP), plus an additional 10% to cover purchase-related expenses such as tax, tags and extended warranties. Cash-out is not permitted on purchase transactions and cash-out refinance transactions are limited to a maximum Loan to Value of 100%. Lending is limited to residents in NC, SC, GA, TN and VA. No pre-payment penalties. Vehicles with branded (flooded, salvaged or reconstructed) titles or motorcycles, boats, RVs and commercial vehicles are not acceptable collateral. Product availability and current rates may be changed at any time at the discretion of the Board of Directors. Borrower must maintain collision and comprehensive insurance protection with a maximum deductible of $1,000 for the life of the loan. Must be age 18 or older to qualify for lending services.

Used Auto Loan is subject to approval. APR = Annual Percentage Rate. Vehicles may not be older than 10 years or have mileage in excess of 150,000 at time of loan origination. Loan terms up to 72 months are available for used vehicles 5 years of age or less with mileage less than 100,000. Loan terms are limited to a maximum of 48 months for vehicle models between 6 and 10 years old, or with mileage that exceeds 100,000 up to maximum of 150,000. LGFCU will finance 100% of the NADA value, plus an additional 10% to cover purchase-related expenses such as tax, tags and extended warranties. Cash-out is not permitted on purchase transactions and cash-out refinance transactions are limited to a maximum Loan to Value of 100%. Lending is limited to residents of NC, SC, GA, TN and VA. No pre-payment penalties. Vehicles with branded (flooded, salvaged or reconstructed) titles or motorcycles, boats, RVs and commercial vehicles are not acceptable collateral. Product availability and current rates may be changed at any time at the discretion of the Board of Directors. Borrower must maintain collision and comprehensive insurance protection with a maximum deductible of $1,000 for the life of the loan. Must be age 18 or older to qualify for lending services.

Share this article: