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Understanding and Overcoming Negative Equity (Part 1)

Negative equity, often referred to as an “upside-down” car loan, can be a very challenging situation for many car owners. It occurs when the outstanding balance on an auto loan exceeds the market value of the vehicle.

For example, if the market value of your vehicle is $10,000 and you owe your lender $15,000, you have $5,000 of negative equity. In the most no-nonsense way of looking at this situation, to sell that vehicle you’d need to hand over the car and $5,000 to clear the loan.

This can make trading in the vehicle quite a challenge, because your new lender will be looking at the negative equity as a negative down payment. In other words, without a down payment you’d be asking a lender to not only loan you the vehicle sales price, taxes, and fees, but another $5,000 on top of that. That’s a tall order, and only the most qualified of buyers would be approved for such a request.

Almost 1 out of 5 Americans is currently upside-down in their car loan. If you are in that group, you are not alone. Stick with me, read on, and let’s work this out.

While a down payment to cover the “negative” is the easiest and most straightforward way of overcoming it, we understand that is not always an option.

This is a two-part series where we take a deeper dive into negative equity and some options to help control and overcome it. With dedication, the right mindset, and proactive steps, it is possible to rise above negative equity and regain control of your financial journey.

Understanding Negative Equity

Negative equity is the result of a car’s depreciation outpacing the rate at which the loan balance decreases. It commonly occurs when car buyers finance unreliable vehicles with long loan terms and small down payments, which can lead to a slower pace of loan repayment compared to the rate of depreciation. Negative equity can also arise if a car owner rolls previous loan balances into a new loan without considering the consequences.

The Impact of Negative Equity

Negative equity can have various serious consequences for car owners. Firstly, it limits financial flexibility, making it challenging to sell or trade in the vehicle without incurring additional costs. Car owners with negative equity may find themselves “stuck” in their current loan or forced to roll the negative equity into a new loan, perpetuating the cycle.

Moreover, negative equity can have long-term financial implications. Car owners may end up paying more interest over the life of the loan, making it harder to build equity in their vehicle. Additionally, negative equity can hinder the ability to qualify for favorable loan terms or interest rates in the future.

Before getting into strategies to overcome negative equity, know that I am my team are here to help. Throughout my automotive career, I’ve helped thousands of people in tough situations put together and execute a successful plan. If you, or anyone you know, feels “stuck” in your vehicle, call me and let’s talk it through.

Continue on to Overcoming Negative Equity: Part 2 to learn some solid strategies to turn that upside-down loan into a positive asset. Click Next to continue.