Negative equity is something most of us go through with every auto loan. It isn’t anything to worry about and evens itself out in the end, but some people aren’t comfortable with the situation. So, that’s why we are going to talk about what negative equity is, and how negative equity affects car loans!
Negative Equity Car Loans
Negative equity is when the value of your car is lower than the amount of loan you have on it. It’s also referred to as ‘going upside down’ on your car loan.
It usually happens at the beginning of a new auto loan where the car depreciates at a faster rate than you pay it off.
It’s not a serious situation. It’s nothing to worry about. You don’t need to take any action unless you want to.
How Negative Equity Affects Car Loans
It doesn’t really. If you’re planning to keep the loan, and the car, you don’t even have to think about negative equity. It only becomes something to consider if you want to change or refinance the loan or need to change the car.
Otherwise, negative equity doesn’t impact your auto loan at all.
How to Get Out of a Negative Equity Car Loan
As we have mentioned already, you don’t need to get out of negative equity unless you’re really not comfortable with it. The loan will soon catch up and then fall below your car’s value so there really is nothing to worry about.
If you want to get out of negative equity, you can. There are two main ways you can even the score.
Lump Sum Payment
Making a one off lump sum payment on the auto loan can even things out. Find out the difference between the car’s value and the outstanding amount and pay it in cash.
Make sure there are no early settlement penalties or overpayment penalties on your loan first though. Also make sure to specify that the overpayment comes off the loan principal and not the interest!
Regular Overpayments
You can also increase your monthly auto loan payment to help speed up the process. Again, as long as your loan allows for overpayments, you can pay extra each month to even things out.
Rounding up is a common practice for auto loans that might help. If your loan payment is $345 per month, rounding it up to $400 per month means a regular overpayment that should even things out.
Regular overpayments can also shorten the term of the loan so you pay less interest too. Just make sure your loan allows them.
There’s nothing wrong with negative equity unless you need to refinance the loan or replace the car. In all other situations, it’s just an accepted period of the loan that we all go through and will pass just like all things. Hopefully this article helped you understand how negative equity affects car loans!
For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!