Can you pay off negative equity?
If you don’t have enough cash in the bank to pay off your negative equity, a car dealer will sometimes allow you to include your negative equity in your new car loan. However, you need to be careful as you could get into more debt and invest more negative equity. If you can stop buying a new vehicle, you can reduce your negative equity by making additional payments for the car loan. Delaying a trade-in is often the best option financially, but it only works if you can stop your trade-in until you’ve saved enough to repay the loan.
Refinancing could help you get a lower APR for car loans. The less you pay interest, the faster you can pay off negative equity. A shorter loan period can help you qualify for a lower interest rate and repay the loan even faster, reducing the time it takes to get your car loan back on the right side. If your finances allow, it’s an easy option to simply pay off negative equity — whether as a lump sum or by adding your monthly payments.
Most car financing is structured using the simple interest rate method, in which such additional payments only go into the main financing amount and not interest. As your costs are higher when trading a vehicle with negative equity, you should consider buying a cheaper vehicle. If the amount you owe for your car loan is higher than the value of the vehicle, you have a negative equity loan. This means that you effectively pay off your previous car along with your new car with a larger amount of financing on which you pay interest.
You might be tempted by low monthly payments, but lower payments extend the life of a loan and can result in more negative equity. Negative equity is common if you recently financed a brand new car, have a high interest rate, didn’t pay a large down payment, or chose a long loan term. While you may not be able to cover the full cost of your negative equity, any amount you can pay upfront will help offset how much you need to finance with your new loan. With cumulative financing costs and a higher interest rate, you could pay more for your car overall.
To determine whether you have positive or negative equity, you need to know the value of your vehicle and the amount you owe on your car loan. Your schedule, the amount of negative equity you have, and the goal you have for your vehicle are important. If you total the vehicle in an accident, most insurance companies only pay for the value of the car, regardless of how much you owe. See if the lender can charge you early disbursement fees (which may also apply if you refinance) and whether they have options to help you combat negative equity.
You can trade in a car with negative equity, but you need to pay off the negative equity or take it into your new car loan. Overrolling your negative equity should be seen as a last resort, especially for bad credit borrowers. In addition to completing the basic process for trading a negative equity vehicle listed above, there are other tips to keep in mind. The longer it takes you to repay your car loan, the more potential you have to stay in a negative equity position.
Once you have these two numbers, subtract the payout offer from the car’s value to determine the amount of negative equity.