If you’re stuck with a car payment you can’t afford or need to change the type of vehicle you drive; you may be out of luck if you owe more on it than it’s worth. It’s called having negative equity, and if you’re at risk of losing your vehicle, the lender can sue you for the difference if the sale of the repo doesn’t bring more than you owe. CrediReady gives the following example: “Let’s say you owed $13,500 on your auto loan before you defaulted. If the lender repossesses the vehicle and sells it for only $11,000, the lender can sue you for the remaining balance of $2,500, plus all fees.” The good news is that there are five solutions to being upside down on your car loan.
Refinance It with a New Loan
If you’re trading in, you can roll negative equity into a new loan if you qualify. The downside is that your payment and interest costs will be higher, and you may be starting out underwater with your new vehicle.
Absorb It with a Lease
To avoid committing to another car, incorporate your loan balance into lease payments. At the end of the term, exercise a buy-out option if you want to keep it, or walk away free and clear from both the car and negative equity.
Beg the Lender for a Short Sale
If a lender knows their money is at risk, they may settle for less than the full balance you owe. Gather proof of hardship and present a cash offer to the bank in writing. Do it before you miss a payment and make the offer generous enough to be attractive. It will negatively impact your credit for a while, but not as much as repossession.
Pay the Difference in Cash
If you have cash, find a buyer who will pay top-dollar. Add your own funds to the kitty and pay off the full amount on the loan. It’s going to hurt, but it frees you up to purchase the new vehicle you need without financing more than you have to.
Make the Math Work
Sometimes the best option is to dig deep and find a way to make the payments until the value of the car and the balance of the loan equalize. It takes time, but if you’re not danger of repossession, it could cost you less in the long run.
The circumstances that cause negative equity are tough to avoid, but understanding how to deal with it is the first step on the road to freedom. Explore your options carefully, and you may be able to get both the vehicle you need and keep your head above water.
If you have more questions regarding refinancing your car or wonder how to qualify for financing for a new car with negative equity, contact our professionals who can help you.
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