I Owe More Than my Car is Worth: What Happens Next

Many of us borrow money to acquire cars since they are pricey purchases. There is a slight chance that your car will be worth less than what you owe because your car loan has a fixed payment but the value of the car depreciates.

 

It does happen, though not frequently.

 

Negative equity, often known as being upside down, refers to having a car loan that exceeds the value of the vehicle. Let's discuss what you should do if this occurs to you.

 

Being Upside Down on Your Car Loan

Negative equity is a risk of buying a depreciating asset. Meaning the car loses value while the loan is fixed.

 

This is especially true for new cars as there is an immediate depreciation before it slows down.

 

 

Cars lose value over time. It is true. Our responsibility is to prevent depreciation from harming your financial situation.

 

The first thing you should do if you find yourself in overdraft on your auto loan is to not panic. Falling into the red only becomes a problem if you intend to sell the car or must make a loan payment.

 

Even if it's not the ideal situation to be in, the loan doesn't care as long as you can afford the payments.

 

 

How to Avoid Your Car Being Worth Less Than You Owe

Being upside down can be prevented, which is why it isn't extremely common. Upside-down situations can be somewhat avoided with a down payment. The same is true of a trade-in.

 

Overpaying your loan as well as making a lump sum payment can eventually level out the debt.

 

The more your down payment or the better the trade-in, the more protection you have against your car's value rising above what you owe, if you're going to purchase a new vehicle.

 

Selecting a car carefully might also have an impact. Cars of certain makes and models lose value more quickly than others. Choosing a car with low depreciation can help you avoid negative equity if you have a small down payment or are using a no-money down car loan.

 

 

Otherwise, if the lender permits it, you can pay off your loan early to make things even. The additional actions listed above, such as lump sum payments and early settlement, can also be beneficial.

 

There is still no reason to panic if you are unable to do any of those things. Negative equity only becomes a problem when you want to upgrade or get a new car.

 

Being upside down is not a problem if you can continue to drive your existing vehicle until it is paid off. All of this won't matter if you can keep up your car payments until the very end.

 

The risk that your car is worth less than you owe is why we always recommend as large a down payment as you can afford. Not only does it reduce your overall car loan, it is insulation against negative equity.

 

Thanks for reading! If you have any more questions, please don't hesitate to contact us here.