Owing more than a vehicle’s worth on a car loan is often referred to as being “upside down.” If you owe $8,000 on your car loan and its only worth $6,000, well, you do the math. Instead of upside down, financial professionals use a less colorful term: “negative equity.” Whatever term you use, it’s an issue you may have to deal with if you ever go to trade in your car for a new one. Being upside down on a trade is pretty common these days. In fact, in 2017, approximately 32% of car trade-ins had negative equity. So, don’t lose sleep over this. It just simply happens in some car transactions. That being said, let’s learn a little more about being upside down.
New cars lose a good piece of their value in the first month of ownership. That loss in value becomes a non-issue several years into the loan. That’s when you hit the breakeven point, or “the point when your loan balance matches the car’s value”. With today’s long loan terms, hitting that break-even point can take a while to reach.
Carrying over negative equity to another car loan is often the only way forward if you want to buy another car or truck. But before you proceed, know that every thousand dollars you roll into the next loan can easily increase your monthly payment by $18. That means a negative equity of $3000 could mean an additional $54 per month tacked on to your new monthly payment. Here’s three alternatives to adding more debt.
Keep your present car: As the sales staff at Rochester Hills Chrysler Dodge Jeep Ram of Rochester Hills, MI advise, it might make more sense to make payments on your existing car for a while longer. Stick it out until you hit the break-even point. If you can make larger monthly payments to your lender, that will help to.
Buy a new vehicle with a big rebate: If you need to get out of your car or truck right away, consider buying a vehicle that has a large cash rebate. A good cash rebate will help offset your negative equity. Some car companies offer these rebates when they need to sell more inventory.
Lease a new car: Rolling over the negative equity into a lease might also make sense. Since lease payments tend to be lower than traditional car payments, your monthly payments might be lower.
Stay “Positive” Sometimes you can’t avoid being upside down. But if you understand how negative equity works and how to manage it, you will have the best chance of getting right side up again.