How to Get Out of a Car Loan With Negative Equity

Negative equity in a car loan occurs when the outstanding amount owed on a vehicle surpasses its current market value. This means if you were to sell your car today, the proceeds would not cover the remaining debt. Rapid vehicle depreciation, especially in the first year of ownership, frequently contributes to this imbalance. Extended loan terms or a low down payment can also lead to negative equity, as the loan balance may not decrease as quickly as the car’s value. This article provides strategies to resolve a car loan with negative equity.

Determining Your Current Financial Position

The initial step in addressing negative equity involves understanding your financial standing. Obtain the accurate payoff amount for your car loan, which differs from the remaining balance on your last statement. The payoff amount includes the principal, accrued interest, and potential fees, providing the exact sum to satisfy the loan. Request a payoff quote directly from your lender via their online portal, phone, or in person. This quote has an expiration date, valid for 7 to 30 days, due to daily interest accrual.

Simultaneously, determine your vehicle’s current market value. This is what your car would fetch if sold today. Online valuation tools like Kelley Blue Book or Edmunds estimate your car’s trade-in or private sale value based on its year, make, model, mileage, and condition. While private sale values are higher, dealership appraisals also provide a realistic estimate. Comparing your payoff amount with the vehicle’s market value reveals the exact amount of negative equity you face.

Strategies When Selling or Trading In Your Car

Once you have a clear picture of your negative equity, several approaches exist if you intend to sell or trade in your vehicle. One method involves paying the difference between your car’s value and the loan payoff amount out of pocket. For example, if your car is worth $12,000 but you owe $15,000, you would pay the $3,000 difference directly to the lender at the time of sale or trade-in. This allows you to start fresh with a new vehicle without carrying over old debt.

Alternatively, many consumers roll over negative equity into a new car loan. This adds the outstanding deficit from your previous loan to the financing for your new vehicle, increasing the total amount borrowed. While convenient, this strategy can lead to a larger loan, higher monthly payments, and the risk of being immediately “upside down” on your new car. Lenders limit how much negative equity they finance, allowing up to 120% to 130% of the new car’s value to be financed, including the rollover amount. Evaluating the new loan’s terms, including interest rate and repayment period, helps avoid compounding your financial burden.

When deciding between selling your car privately and trading it in at a dealership, procedural differences emerge with negative equity. Selling privately can yield a higher price than a dealership trade-in, potentially reducing the negative equity you need to cover. In a private sale, you are responsible for handling the loan payoff directly, securing funds to cover negative equity before the title transfers. In contrast, a dealership manages the payoff of your existing loan when you trade in your car, simplifying the process. While convenient, dealerships offer less for trade-ins, which could mean a larger negative equity amount to contend with, either by paying it out-of-pocket or rolling it into a new loan.

Strategies While Retaining Your Car

If selling or trading in your vehicle is not an immediate option, several strategies can help you address negative equity while keeping your current car. One approach is refinancing your existing car loan. Refinancing involves securing a new loan to pay off your current one, ideally with more favorable terms like a lower interest rate or a shorter repayment period. While refinancing with negative equity can be challenging, it is possible, especially with a strong credit score or if interest rates have dropped. Lenders evaluate your creditworthiness and the loan-to-value (LTV) ratio of your vehicle; an LTV over 125% can make refinancing more difficult.

Making extra payments on your existing car loan is an effective way to reduce negative equity over time. When you make a car payment, a portion goes toward interest and the remainder toward the principal. Additional payments, particularly those designated to the principal, accelerate the reduction of your loan balance. This strategy helps build equity faster and reduces the total interest paid over the loan’s life. Before making extra payments, confirm with your lender how these funds will be applied and check for any prepayment penalties.

Securing a personal loan to cover negative equity can be a viable option, particularly if you intend to sell your car immediately afterward. This involves taking out an unsecured personal loan for the negative equity amount, then using those funds to pay off the car loan, freeing the vehicle’s title. With the car loan settled, you can sell the vehicle without negative equity, using sale proceeds to potentially offset some personal loan debt. Personal loans are unsecured, meaning they do not use the car as collateral, but they may come with higher interest rates than secured auto loans, especially for individuals without excellent credit.