How To Refinance A Car With Negative Equity – Canadian Car Brokers Help Canadians Get Better Car Loans with Lower Rates, Lower Payments and up to $30,000 in Cash Back

The average Canadian now carries 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, or $23,800.

How To Refinance A Car With Negative Equity

How To Refinance A Car With Negative Equity

Moreover, almost one in three vehicles traded in 2018 had negative equity. All of these “negative equities” have an average value of -$7,051.

Refinancing A Car Loan: The Pros And Cons You Need To Know

If you’re one of them, you might be wondering, “How can I get rid of negative equity on my car?” You may not be sure about the negative amount, and how it affects your finances.

However, don’t worry, because we are here to solve your problem. Read on so you can learn all about cars with negative equity and what to do about it!

The term “equity” refers to ownership of assets that have linked “liabilities”. Liabilities are usually in the form of outstanding debts or loans.

When it comes to liability on a car loan, this usually refers to the amount you owe the lender. Negative equity occurs when the amount owed is higher than the actual value of the car. Some people also refer to this as a “reverse” or “underwater” car loan.

How To Refinance A Car Loan

Either way, this means you owe your car lender more money than the car is worth financially.

It’s fairly easy to tell if you have negative equity by knowing these two key factors. Then, simply subtract your outstanding car loan balance from the market value of your vehicle. If it shows negative, then you have negative equity.

Let’s use the average outstanding car loan debt of $20,000 in Canada as an example. Let’s also say that the fair market value of your vehicle is now only $15,000.

How To Refinance A Car With Negative Equity

So, $15,000 (the market value of your ride) less/minus $20,000 (your car loan balance). This means you have negative equity totaling $5,000.

How To Refinance A Car

Depreciation, interest rates, credit scores and down payments all play a role here. The same goes for the loan term 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 understanding of how you can end up with negative equity.

New cars, on average, depreciate at a rate of between 30% and 40% in the first year alone. Most are more resistant to depreciation, but others lose even more. Japanese cars, such as Toyota and Honda, are the cars that seem to retain the highest value over time.

You can also get negative equity if your car has a faster rate of depreciation. The same is true if you make small payments on your car loan each month.

Negative Equity On A Car Loan: What You Need To Do!

In Canada, the average car loan interest rate is between 4.5% and 10%. The lower the interest rate you can secure, the less money you owe the lender. This, in turn, reduces your risk of getting “underwater” on your car loan.

Traditional auto lenders, like banks, take credit scores seriously. Therefore, they usually charge higher interest rates to Canadians with low or low scores. Most others reject such applicants outright.

With that said, your credit score is one of the most important things to know before applying for a car loan. You can get it for free from Canadian Auto Brokers, and it will tell you where you stand financially. If it’s too low, don’t risk a credit check from the bank that could lower it further.

How To Refinance A Car With Negative Equity

Making a down payment on a car loan reduces the amount of capital that the lender has to take out. As a result, the borrower owes less to the lending institution.

Trade In Car Or Refinance

This also means that interest rates are charged on smaller loan amounts. Therefore, you can enjoy lower interest payments.

Overall, the down payment minimizes the gap between the money borrowed and the actual value of the car. Conversely, not making a down payment can also contribute to having negative equity.

If you can afford to pay off your car loan within five years, then you should get a five-year loan term. That’s because the longer the period, the more interest accrues. This, in turn, increases the amount you owe on your car.

The make and model of your ride also affects the price, so the more luxurious your car, the more expensive it will be. It’s more expensive to insure a luxury vehicle, so that can also add to the cost of your car.

Learn The Basics Of Refinancing An Auto Loan

Regardless of how you drive it, putting a lot of wear and tear on your ride leads to faster depreciation. Lack of proper maintenance also results in faster deterioration. All of this can then make your car’s value fall lower than similar makes and models.

Negative equity is usually not a big deal if you intend to keep your car 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 you have negative equity at one point.

Owing more on your car loan than it’s worth becomes an issue if you want to replace it with a new car in just a few years. If it turns out you have negative equity, then you can no longer use your old car to help pay for the new car. You also need to shell out more than what you might spend on that brand new vehicle.

How To Refinance A Car With Negative Equity

Things can get worse if you have negative equity and your car is completely damaged in an accident. Your car insurance company will write you a check, but it still won’t be enough to pay off your entire car loan debt. You have to cover the rest using your own money.

How To Refinance A National Bank Car Loan

The same is true if you get sick, lose your job, or face a severe life event that leaves you unable to pay the loan. You cannot sell the vehicle because it still has a liability on it. Even if you find a willing buyer, the money you’ll get from the sale still won’t be enough to pay off your car loan.

Refinancing is one of your best options for getting rid of negative equity on your ride. You can also get a cash back program or buy a new car and can eliminate your debt on your old car!

Most Canadians cannot afford not to own a vehicle, as 11.4 million of them drive to work. If going carless isn’t an option for you, then you might want to think about refinancing your current car loan.

Refinancing gives you the opportunity to lower your car loan interest rate. With a loan refinance, you’ll be taking out a new loan to replace your old (and most likely high) loan. It is a new contract that allows you to get not only a reduced interest rate but also better payment terms.

What’s Negative Equity On A Car Loan?

By refinancing your car loan, you can choose to modify your loan term to a shorter term. This can help you get out of the loan in the water because you will pay more for the loan. Making larger payments on your debt then reduces 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 money you use to pay interest alone. At the same time, more of your loan repayments cover the actual loan principal.

The smaller your principal loan amount, the smaller your negative equity. Also, keep in mind that refinancing will not involve selling your car to get out of the reverse loan. So you don’t have to worry about not being able to work.

How To Refinance A Car With Negative Equity

When considering refinancing, be sure to check for additional benefits such as cash back. You may 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 a program can help you balance your equity.

Refijet Auto Refinance Review

The same cashback offer usually applies to new car sales as well. If you are approved, then you can enjoy a massive cash rebate that can get rid of your negative equity! At the very least, the cash back you get will wipe out most of what you still owe on the old car.

Apart from cashback offers, there are also referral programs offered by car brokers. You will be paid every time someone you refer to a broker contracts with that firm. You can then use the money you earn to make additional payments on your own car loan.

By paying more towards your car loan, you can also reduce negative equity. Every little extra payment you make will help you get out of your reverse loan.

There are many other ways to earn extra income, such as getting a side gig outside of your main job. This, in fact, has become the norm in the Great White North, with one in three Canadians having a “side hustle”.

Between Bankruptcy And Negative Equity: Making The Tough Choices

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