One of the most irritating situations in car financing is to be stuck with an upside down car loan. Negative equity can be a very frustrating problem, especially if you’re trying to get rid of a car. However you’re not out of options yet. In this article we’ll discuss some of the ways to escape negative equity.

What Is Negative Equity?

Let’s start by getting our terms clear, what is negative equity? And what is an upside down loan? Negative equity is the opposite of equity, equity is when you own an asset that has become worth more than when you bought it, meaning if you were to sell it you could make a profit, the most common example being houses because houses gain value overtime. 

Cars are the opposite, they lose value over time, meaning that when you buy a car, it’s almost immediately worth less than what you paid for it. Since most cars are bought with a loan, this results in the loan being “upside down” meaning you owe more on the loan than the car is worth. The negative equity in this case is the difference between the car’s value, and the amount still to be paid off on the loan. 

The “Do Nothing” Approach

Negative equity isn’t automatically a problem, if you’re planning to keep the car until after the loan is paid off then it’s not really an issue at all, as such one response to negative equity is to do nothing about it. If you’re trying to sell a car with negative equity then you’re going to have issues. 

When you sell a car with a loan attached you typically use the value of the car sale to repay the remainder of the loan. However if you have negative equity then you’ve got more loan to repay than the sale will make, and you’ll have to pay the rest out of pocket, meaning you’d actually be making a loss on selling the car. 

Having A Plan

The only real way to get rid of negative equity is to pay it, but the question is how quickly are  you going to pay it off. Most lenders have rules against lump sum repayments but you can always talk to them and try and negotiate, or if they’re not budging. You can take your business elsewhere and refinance the loan. You could switch to a faster repayment cycle to get the loan paid faster. Or, if you really just need to shift the car fast, there’s always the option of just eating the extra payment and taking the loss.