What to Do If You Owe More Than Your Car Is Worth

Buying a car with a loan is one of the best ways to get a vehicle you know you can rely on, even if you don’t have the whole MSRP in a lump sum. When you buy a vehicle with a loan, though, you have to think about things like interest rates and depreciation, which can negatively affect your car’s value.

When these factors catch up to you, you could owe more for the vehicle than it is worth. This is called negative equity, or “being underwater,” or “upside down” on the car loan. Knowing what to do if your vehicle is not worth as much as you owe can help you make the best decision for yourself and your bank account.

How Do You Get Negative Equity on a Vehicle?

Negative equity on a car loan can occur for several reasons. The most common is a high interest rate. When you get a loan on a vehicle, you pay interest, which can make that vehicle much more expensive than the sticker price. As that interest compounds and builds up, the value of your car and what you owe will eventually get closer and closer, especially if you make relatively small monthly payments.

Depreciation is another important factor that can give you negative equity on your vehicle loan. Your car may depreciate faster than you can pay, depending on your loan terms. On average, vehicles will lose 23.5% of their value after the first year. If you have a particularly long loan term to make smaller payments, this can cause you to go underwater on your vehicle. To avoid this, it is almost always better to get a shorter loan term so you end up paying off the used car before it depreciates too much and you don’t pay a lot in interest over the years.

What to Do if You Owe More Than Your Car is Worth

Sometimes, no matter how careful you are, you can still have negative equity on your car loan. This means that if you sell the vehicle, you will not be able to recoup the amount of money you spent on it. This can be a financial issue, especially if you want to turn the vehicle around and eventually purchase a new car. Fortunately, there are some things you can do to get positive equity back into the vehicle and get yourself out of the spiral. The right method for you will vary, depending on your situation, but they can all be a big help if you don’t want to lose money.

Make Higher Payments

The best thing you can do if you want to get out of a negative equity situation with your auto loan is to make higher monthly car payments than what you have previously been making. The biggest contributor to being upside down on a new car loan is not paying enough monthly to stay on top of depreciation and interest. Making higher payments every month is a great option, even if it is a financial hardship. Putting as much money as you can into the loan can help you outrun the expensive factors and put yourself on top of the loan so you don’t lose too much money on it.

Sell the Car Privately

While it can be tempting to try to salvage the loan and keep your vehicle, sometimes your best bet is to sell it to a private buyer. Someone in a better financial situation may be more equipped to make bigger loan payments, and if you can find someone willing to take over the loan, you can get yourself out of a bad set of circumstances.

If you focus on getting the highest possible price and spend a little money upfront for detailing and high-quality photographs, you could end up recouping your losses and coming out on top. The private market will be much more lucrative than what you can get to trade in a car or try to sell the car to a dealership.

Refinance Your Loan

Refinancing could be a great choice if interest is the main cause of your being underwater on a car loan. If you have a better credit score or the market is friendlier to borrowers than when you first bought the car, you can get a new loan with a better interest rate.

Remember that refinancing the loan amount almost always involves fees and fines from the lender, which can be very expensive in the long run. Be sure to know all the costs associated with refinancing to decide whether it is the right choice for you and your current financial situation.

Protect Your Investment With an Extended Warranty

Being upside down on your car’s remaining loan balance can be stressful, but there are ways to better the circumstances and save yourself some money. As you make car payments on your vehicle, the last thing you want is to deal with expensive repairs or breakdowns, adding to the total cost of ownership, and bringing on even more negative equity. An extended warranty is a great way to get the help you need to pay for repairs as soon as they arise.

With a protection plan in place, you can save money at the shop and keep the car’s value as high as possible to get the most for it when it comes to selling. Explore our extended warranty provider reviews and buying guide to find out which extended warranty will work best for you and your vehicle.