- How To Get Rid Of Negative Equity
- How To Trade In A Car With Negative Equity: Your Options
- Automobiles Personal Finance.
- Used Infiniti Q60 For Sale Near Me In League City, Tx
- How To Remove Negative Items From Your Credit Report
How To Get Rid Of Negative Equity – Negative equity in a car loan can set you back financially. Here’s what you need to know to avoid it.
Has anyone ever told you that a new car loses its value as soon as it leaves the lot? If so, you’ve probably put it off because it sounds a little ridiculous. After all, cars are expensive and can’t depreciate that fast, right? wrong
How To Get Rid Of Negative Equity
According to CARFAX, a car loses more than 20% of its value in the first year off the lot. This depreciation, along with bad car loan terms or terms, can create what’s called negative equity, even if you make all of your loan payments on time.
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Negative Equity: If the amount owed on collateral (such as your car or home) is more than it is worth, there is “upside” on the loan.
Negative equity, sometimes referred to as “upside down,” is when you owe more on your loan than your vehicle is worth on a car loan.
To find out how much negative equity you have, start by figuring out how much money your car is actually worth, as retail value is quoted. You can easily find your vehicle’s retail value by going to trusted sites like Kelly Blue Book (KBP) or Edmonds and using their car appraisal tools.
Once you find out the value of your vehicle, subtract it from your current vehicle loan balance. This number is the amount of negative equity you have.
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For example, if your car is worth $5,000 and you still have $10,000 left on your loan, you have $5,000 of negative equity.
Another way your negative equity is reflected is in your loan-to-value (LTV) ratio. This ratio is found by dividing your loan amount by the current retail value of your vehicle. If your LTV is over 100%, your loan is worth more than your car and your equity is in the red. A high LTV can be reason enough for lenders to deny your loan, including offering to refinance.
A loan-to-value ratio greater than 100% means you owe more on your loan than your vehicle is worth. An LTV greater than 125% will make it difficult, but not impossible, to qualify for a refinance loan.
If your LTV is less than 100%, your car is worth more than you owe on your loan. The lower your LTV, the better.
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Negative equity is always best avoided, but that’s easier said than done. Here are some reasons why you might find the upside.
Making a small down payment on your auto loan is an easy way to set yourself up for negative equity. The more money you pay down, the more equity you have in your vehicle, which will help you outpace your vehicle’s depreciation.
Additionally, paying more toward your down payment can help reduce the amount of interest you pay over the life of the loan. If you make too little down payment, this interest will add up quickly and extend the life of the loan. The longer you’re stuck paying it off, the more negative equity your car will continue to lose in value.
If you finance a car that costs more than you can afford (or roll over a loan from a previous auto loan), you may already be driving the loan upside down.
How To Trade In A Car With Negative Equity: Your Options
If you struggle to make your monthly payments and fall behind on your debt, you can quickly find yourself in negative equity. You can also consider extending the length of your loan term to afford your monthly payments—which can make the loan even more upside-down.
According to Edmonds, the most common length of a car loan is 72 months or 6 years. Since your car is only worth 40% of what you originally bought it for after five years, a longer loan term will stretch your payments out longer than your car is worth.
People drive vehicles for different reasons, some just to get to and from work, others to test their limits for fun. No judgment here if you’re one of the latter! However, if you are, you should know that your car will wear out faster than the same model used as a commuter, especially if you put in fast miles. This lowers the value of your vehicle and opens you up to more negative equity.
Routine maintenance on a vehicle may seem never-ending and expensive, but not keeping up with it can cost you some equity in your car. Just like humans, vehicles need to be healthy to extend their lifespan.
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If your car becomes inoperable, it may not have any value as a trade-in or even a private party sale, but you may owe the entire loan.
When trading in your vehicle, converting negative equity into a new auto loan is sometimes an option. Your lender will consolidate your negative equity by paying off your original loan and adding it to your new auto loan.
It seems attractive to those with low trade-in value and those who don’t cover the full cost of their new vehicle.
However, if you transfer your negative equity, you will extend the life and cost of your new loan. This will cost you more interest and, unfortunately, set you up for even more negative equity if you can’t keep up with the depreciation on your new vehicle.
Automobiles Personal Finance.
The amount of negative equity you can convert into a new loan depends on the new lender.
Your new lender will need to review your income, credit report, credit score, and other factors to find out how much you’ll be approved for. If you have bad credit, you may not be allowed to transfer your negative equity.
Once you accumulate negative equity, you’ll want to get rid of it as soon as you can. Here are some tips for getting back in the black:
Increasing your monthly payment by $0 will save you $0 in interest, and you’ll pay off your loan 0 months earlier!
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If you have a reverse car loan, you’ll be trying to get as much of your car’s value back as possible, and selling is a great way to do that. Fortunately, you don’t have to have positive equity in the first place, although it’s a good idea.
With a private sale, you decide the price of your vehicle and keep all of the profits. Depending on how successful your sales are, this can help pay off your negative equity quickly, if not completely.
Make sure you don’t undervalue your car in order to sell it quickly. You still have to pay off your loan in full, so your goal should be to get the most money for your vehicle.
Trading in your vehicle when you have negative equity on your current car loan can be a little confusing.
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Dealerships tend to pay you less than if you sold it in a private sale, leaving you with negative equity, but they also control whether or not you can convert your negative equity into a new car loan. If they decide against it or approve less than what’s needed to cover your negative equity, you’ll be stuck paying the difference before buying your new car.
If you want to get rid of your vehicle quickly to prevent your negative equity from building up, you have the option of selling it to a dealership. Trading in your vehicle is like a loan for a new vehicle, while selling it outright is like cash back. In fact, some dealerships will even pay you in cash!
As with trade-ins, a dealership will often pay less for your vehicle than it would fetch in a private sale. This allows the dealer to turn your vehicle in for a profit.
To avoid negative equity in the future, consider the following before buying your next car:
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Negative equity is always best avoided, but if you find it, that’s okay. Take a deep breath, come up with a plan, and stick to it!
Once you’re back in the black, learn from the experience and make sure you have a plan in place to get you on the right side of your next loan.
Micah Murray is a personal finance writer who has written for Money Under 30, ChooseFi, Leverage Rx, and more. She lives in Maine with her husband, their three cats, and their dog. In his spare time, he can be found around a campfire listening to true crime podcasts.
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