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How To Get Out Of Negative Equity On A Car – Canadian Auto Brokers helps Canadians get better auto loans with lower rates, lower payments and up to $30,000 in cash back
The average Canadian now has nearly $73,000 in total debt. Non-mortgage debt, which includes credit card usage and yes, car loans, accounts for nearly a third of that amount, or $23,800.
How To Get Out Of Negative Equity On A Car
Moreover, almost one in three vehicles traded in 2018 had negative equity. All these “negative actions” had an average value of -$7,051.
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If you’re one of these people, you’re probably wondering, “How can I get rid of negative equity on my car?” You may not even be sure what these negative amounts are and what impact they have on your finances.
Don’t worry though, we’re here to clear things up for you. Keep reading to learn all about negative equity cars and what to do about it!
The term “equity” refers to ownership of assets that bind “liabilities”. Liabilities are usually in the form of outstanding debts or loans.
When it comes to car loan obligations, this usually refers to how much you still owe the lender. Negative equity occurs when the amount owed is greater than the actual value of the car. Some people also call these “upside down” or “underwater” car loans.
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Either way, this means you owe more money to the car lender than the car is worth financially.
It’s fairly easy to find out if you have negative equity by knowing these two primary factors. Then simply subtract your outstanding auto loan balance from the market value of your drive. If it turns out negative, then you have negative equity.
Let’s use the average car loan debt of $20,000 in Canada as an example. Let’s also say that the actual market value of your vehicle is now only $15,000.
So $15,000 (the market value of your ride) less/minus $20,000 (your auto loan balance). This means you have negative equity of $5,000.
Debt To Equity Ratio (d/e)
Amortization, interest rates, credit scores and down payments all play a role here. The same applies to the term of the loan you choose, the type of car you drive and your driving behavior.
We’ll quickly touch on all the factors below to give you a better idea of how you can end up with negative equity.
On average, new cars depreciate between 30% and 40% in the first year alone. Most cope better with depreciation, but others lose even more. Japanese cars, such as Toyota and Honda, are the ones that seem to hold the most value over time.
You can also end up with negative equity if your car has a faster depreciation rate. The same is true if you make small payments on your car loan each month.
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In Canada, interest rates on auto loans average between 4.5% and 10%. The lower the interest rate you can secure, the less you will owe the lender in total. This, in turn, reduces the risk of an “underwater” car loan.
Traditional auto lenders, like banks, take credit scores seriously. As such, they typically charge higher interest rates to Canadians with low or poor credit scores. Most others reject such applicants.
That said, your credit score is one of the most important things you need to know before applying for a car loan. You can get this for free from Canadian Auto Brokers, and it will let you know where you stand financially. If it’s too low, don’t risk credit checks from banks that can lower it further.
Paying a down payment on a car loan reduces the amount of equity that the lender needs to set aside. As a result, the borrower owes the lending institution less.
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It also means that the interest rate is applied to a smaller loan amount. As such, you can enjoy lower interest payments.
Overall, the down payment minimizes the gap between the borrowed money and the actual value of the car. Conversely, failure to pay down payments can also contribute to negative equity.
If you can afford to pay off your car loan in five years, then you should insure for a five-year term. This is because the longer the term, the more interest it accrues. This, in turn, increases the total amount of what you owe on your car.
The make and model of your car also affects its price, so the nicer your car is, the more expensive it is. Luxury vehicles are even more expensive to insure, so this can increase your car costs.
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As for how you drive it, the high wear and tear on your ride leads to faster depreciation. Lack of proper maintenance also leads to faster deterioration. All of this can then cause your car’s value to drop below similar makes and models.
Negative equity is usually not a big problem if you intend to keep your car for as long as it can serve you. In Canada, this often means driving the same vehicle for an average of 12.88 years. In this case, you may not even know that you had negative equity at some point.
Owing more on your car loan than it’s actually worth becomes a problem if you want to trade it in for a new car in just a few years. If you turn out to have negative equity, then you can no longer use your old car to pay for a new one. You will even have to shell out more than what you probably budgeted for a brand new vehicle.
Things could get worse if you have negative equity and your car is completely destroyed in a crash. Your auto insurance company will write you a check, but it still won’t be enough to pay off the entire car debt. You will have to cover the rest with your own money.
The Debt To Equity Ratio Formula
The same is true if you get sick, lose your job, or face a difficult life event that makes you unable to repay your loan. You can’t just sell the vehicle because it still has obligations on it. Even if you find a willing buyer, the money you get from the sale will still not be enough to pay off the car loan.
Refinancing is one of your best options to get rid of negative equity on your ride. You can even secure a cash back program or buy a new car and eliminate what you still owe on your old car!
Most Canadians can’t afford not to own a vehicle, given how 11.4 million of them drive to work. If going without a car is not an option for you, you may want to consider refinancing your current auto loan.
Refinancing gives you the opportunity to lower the interest rate on your auto loan. With a loan refinance, you’ll take out a new loan to replace the old (and most likely high-interest) loan. It is a new contract that allows you to secure not only a reduced interest rate but also better payment terms.
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By refinancing your car loan, you can choose to change the term of the loan to a shorter one. This can help you get out of an underwater loan because you will pay more for the loan. Higher payments towards your debt then reduce the negative equity on your car.
Being able to lower your interest rate also means you make your loan more affordable. The lower the rate, the less of your money goes to just paying interest. At the same time, more of your loan payments cover the actual loan principal.
The lower your loan principal amount, the lower your negative equity. Also, keep in mind that a refinance will not involve selling your car to get out of the reverse loan. As such, you don’t have to worry about not being able to get to work.
When considering refinancing, be sure to check for additional benefits like cash back. You can even qualify for up to $30,000 in cash back when you refinance your existing car! This still depends on the type of vehicle you own, but such programs can help you balance your equity.
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The same cashback offers usually apply to new car sales. If you get approved, then you can enjoy a huge cash rebate that can get rid of your negative equity! At the very least, the cash back you get will eliminate a significant portion of what you still owe on the old car.
In addition to cashback offers, there are also referral programs offered by auto brokers. You will be paid every time the person you refer to a broker signs a contract with that firm. You can then use the money you earn to make extra payments on your own auto loan.
By paying more towards your car loan, you can reduce negative equity as well. Every bit of extra payment you make will help you get out of your reverse loan.
There are many other ways to earn extra income, such as side gigs outside of your main job. This has, in fact, become quite common in the Great White North, with one in three Canadians having a “side hustle.”
How Do I Know If I Have Positive Or Negative Equity In My Car?
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