How to Get Out of a Car With Negative Equity

When the amount owed on an auto loan exceeds the vehicle’s current market value, negative equity occurs. Also known as being “upside down” on a car loan, this situation can arise from rapid depreciation, a small or no down payment, or an extended loan term. Many people find themselves in this position, and understanding how to navigate it is important for financial well-being. This article outlines strategies to address negative equity.

Assessing Your Negative Equity Position

Accurately determining your negative equity requires knowing your current loan payoff amount and your vehicle’s true market value. Lenders provide payoff amounts through online portals, statements, or by phone, often offering a “10-day payoff quote” that accounts for daily interest accrual. This figure represents the total amount needed to satisfy the loan in full.

Assess your vehicle’s current market value using reputable online valuation tools like Kelley Blue Book, Edmunds, or NADA Guides, which provide estimates based on the car’s make, model, year, mileage, condition, and features. Dealership trade-in estimates tend to be lower than private sale values. Comparing the loan payoff amount to the vehicle’s market value reveals the precise amount of negative equity.

Selling or Trading In Your Vehicle

Selling or trading in a vehicle with negative equity presents distinct processes and financial considerations.

Private Sale

When pursuing a private sale, the seller is responsible for covering the negative equity gap, either with cash or a personal loan. The process requires ensuring the lien is released and the title is properly transferred. Upon full loan payment, the lender issues a lien release. The process for obtaining a clear title varies by jurisdiction; confirm specific requirements with your local motor vehicle department.

Dealership Trade-In

Trading in a vehicle with negative equity at a dealership often results in the negative equity being rolled into the financing of a new vehicle. This adds the outstanding balance from the old loan to the principal of the new car loan, immediately increasing the new loan amount. While convenient, this method can perpetuate negative equity, potentially leading to a larger loan amount and increased interest costs over the new loan’s term. This approach should be carefully considered, as it may result in being “upside down” on the new vehicle from the outset.

Refinancing Your Auto Loan

Refinancing an auto loan can help manage negative equity, especially if your credit has improved. Start by checking your credit score, as a higher score can lead to better interest rates. Lenders, including banks, credit unions, and online providers, evaluate your creditworthiness, payment history, and the vehicle’s loan-to-value (LTV) ratio. A lower LTV ratio generally increases approval likelihood and better terms.

The application requires personal financial information, proof of income, and details about your current vehicle and loan. Lenders also consider the vehicle’s age and mileage, often setting maximum limits like less than 10 years old or under 150,000 miles. They may also require a minimum remaining loan amount or term, such as $5,000 or 24 months.

Refinancing helps address negative equity indirectly by reducing the interest rate, allowing more payments to go toward the principal, or by extending the loan term to lower monthly payments. While it doesn’t eliminate negative equity directly, it creates a more manageable financial situation, making it easier to pay down the principal and achieve positive equity. Compare offers from multiple lenders for the best terms.

Alternative Approaches to Negative Equity

Beyond selling, trading in, or refinancing, several other approaches can help address negative equity.

Additional Principal Payments

Making additional principal payments on your existing loan accelerates the reduction of the loan balance, decreasing interest paid and closing the gap between the loan amount and vehicle value more quickly. Confirm with your lender that extra payments are applied directly to the principal, not future scheduled payments.

Keeping the Car Longer

Keeping the car for a longer period allows its depreciation rate to slow while consistent loan payments reduce the principal. Over time, the vehicle’s value can “catch up” to the outstanding loan amount, resolving negative equity without immediate financial outlay. This option suits those without an urgent need for a new vehicle.

Voluntary Repossession

Voluntary repossession, or surrender, is an option if you can no longer afford car payments. This involves returning the vehicle to the lender, but it does not eliminate the debt. The lender sells the vehicle, and you remain responsible for any “deficiency balance”—the difference between the sale price and the remaining loan, plus fees. This can severely impact your credit score for up to seven years and may lead to collection efforts.

Personal Loan for Gap Coverage

If a private sale leaves a gap between the sale price and loan payoff, a personal loan can cover the negative equity. This allows the sale to proceed while shifting the debt to an unsecured personal loan. However, personal loans often carry higher interest rates than auto loans, making this a short-term solution or last resort.