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Can you pay off negative equity?

Posted by jcbrosse2 on April 7, 2022
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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. This typically means that you’ll make higher monthly payments over a longer period of time, with potentially a higher interest rate. As your costs are higher when trading a vehicle with negative equity, you should consider buying a cheaper vehicle. A shorter contract with the same interest rate increases the monthly payment but speeds up the interest rate at which you can gain equity and pay off the car in full.

If you have some time and want to keep the car, saving a down payment and refinancing at a lower annual interest rate will help you repay the capital faster and reduce your negative equity. Both options can help that more money is used to reduce loan capital, reducing negative equity and allowing you to repay the loan faster. When a car dealership offers to repay the total amount you owe on your car, it usually means that they’ll use your negative equity towards your next car loan, even if it’s more than the value of the vehicle. If your car has negative equity, it’s usually best to wait until you bring it up to trade in.

A trade-in vehicle and a down payment can make financing a new car a little easier, more convenient, and more affordable. It may make financial sense to trade a car with negative equity if the car is in poor condition and unreliable. This keeps your expenses lower and allows you to offset how much you owe for your new car and how much you have to pay to cover your trade-in. When buying a car, it’s a good idea to get pre-approval, regardless of whether your vehicle has negative equity or not

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While paying back the full balance of your car loan may be inevitable, some ways to deal with a flipped car loan are better than others. The best way out is to keep the car you have and pay it off until you own it or until the loan amount is less than the car’s value. 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. The negative equity of your first loan doesn’t just disappear, it’s just added to the price of the next funded vehicle.

The money saved on maintenance, insurance, and gas can help you pay off the remaining balance of your car or go into a savings fund to get a larger down payment on the next car you buy.

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