How to Get Rid of a Vehicle With Negative Equity
Learn how to effectively manage and eliminate the common financial challenge of owing more on your car than it's worth.
When a vehicle’s market value is less than the outstanding balance on its loan, the owner faces a situation known as negative equity. Also called being “upside down” or “underwater,” this means a vehicle’s sale price would not cover the remaining debt. Negative equity can arise due to various factors, including rapid depreciation, making a small or no down payment, or opting for a long loan term. For many individuals, addressing negative equity becomes a concern when they need to sell their vehicle or acquire a different one.
Determining Your Negative Equity
Determining the precise amount of negative equity is the first step. This calculation requires two key pieces of information: your current auto loan payoff amount and your vehicle’s current market value. The payoff amount is the exact sum needed to satisfy your loan, which can differ from the balance on a monthly statement due to accrued interest or fees. Most lenders provide this figure through their online portals, on your account statement, or by contacting their customer service directly.
Estimate your vehicle’s market value using reliable valuation tools and appraisals. Reputable online resources such as Kelley Blue Book (KBB), Edmunds, and NADA Guides allow you to input details like your vehicle’s make, model, year, mileage, condition, and features to receive an estimated value. It can also be beneficial to obtain quotes from local dealerships, as their appraisals reflect real-world market demand and the vehicle’s specific condition. Once both figures are known, negative equity is calculated by subtracting the vehicle’s market value from the loan payoff amount. For instance, if you owe $10,000 but the car is only worth $7,000, your negative equity is $3,000.
Selling Your Vehicle with Negative Equity
Selling a vehicle with negative equity requires managing the financial gap. Regardless of the selling method, negative equity must be paid off to transfer the title, as the lender holds a lien until the loan is satisfied.
A private sale often yields a higher selling price compared to a dealership trade-in, potentially reducing the amount of negative equity that needs to be covered. In a private sale, the buyer pays the agreed-upon market value, and you are responsible for paying the difference between the sale price and your loan payoff amount directly to your lender. This process involves coordinating with your lender to ensure the lien is released and the title is transferred appropriately to the buyer. Some lenders may even facilitate the sale at their office to manage the paperwork and funds securely.
Alternatively, trading in your vehicle at a dealership can simplify the process, as the dealership handles the loan payoff and title transfer. With negative equity, a common practice is for the dealership to “roll over” the outstanding balance into the loan for your new vehicle. This means the negative equity from your old car is added to the principal of your new car loan, increasing the total amount financed. While this can offer convenience by avoiding an immediate out-of-pocket payment, it also results in higher monthly payments and a longer loan term, potentially keeping you in a negative equity position on the new vehicle. To avoid rolling over debt or to cover the deficit in a private sale, options include using personal savings or obtaining a personal loan.
Refinancing Your Auto Loan
Refinancing an auto loan can manage negative equity, especially if your financial circumstances have improved or interest rates have dropped. Refinancing involves securing a new loan with different terms to pay off your existing auto loan. This can potentially lead to a lower interest rate, which reduces the total cost of the loan, or a longer repayment term, which lowers your monthly payments.
To pursue refinancing, check your credit score, as a higher score can qualify you for better rates. You will also need to gather financial documents, such as proof of income and your vehicle’s information, and compare offers from various lenders. While refinancing can make monthly payments more affordable and allow you to pay down the principal more effectively, it does not eliminate the negative equity itself.
Extending the loan term, for instance, can reduce your monthly burden but may result in paying more interest over the loan’s lifetime. Refinancing may be more challenging with substantial negative equity, as lenders prefer a loan-to-value ratio below 100%.
Other Approaches to Address Negative Equity
Beyond selling or refinancing, other strategies can address negative equity, though some carry significant implications. Pay down the loan more aggressively. By making extra payments toward the principal balance, you can reduce the amount owed faster than the vehicle depreciates. This helps to build equity over time, eventually bringing the loan balance below the vehicle’s market value. Such payments can be made through a lump sum or by consistently adding a small amount to your regular monthly payment, ensuring these additional funds are applied directly to the principal.
Voluntary repossession or surrender, where you return the vehicle to the lender, is a last resort. While it avoids the vehicle being forcibly taken, it has a negative impact on your credit score, remaining on your credit report for up to seven years. Furthermore, returning the vehicle does not absolve you of the debt. Lenders sell the repossessed vehicle at auction, and if the sale proceeds are less than the outstanding loan balance, you will be responsible for the “deficiency balance.” The lender can pursue collection of this deficiency, potentially through legal action, further damaging your financial standing.