![]() ![]() GAP waivers and GAP insurance protect your wallet should your vehicle be deemed a total loss while you still owe money on it. This fee will wipe out any savings you might’ve earned from paying off the loan balance early. If you can pay towards the principal either from savings or a sudden windfall, like a tax refund or bonus from work, that would be ideal.”īefore you start making payments though, check to see if your loan has a prepayment penalty. If the borrower has the ability to do so, making extra payments makes the most sense. Roger Douville explains, “Most people want to trade their vehicle simply because they have grown tired of the current vehicle or want something different or newer. If you have the money, pay down the loan principal in order to reduce the interest accrued over the life of the loan. But there are steps you can take in order to get yourself in a better financial situation than you’re currently in. You’re probably not going to convince someone to buy your car from you for more than it’s worth. The strategy is different if you have time,” says RateGenius Chief Lending Officer Roger Douville. “The decision to act on a negative equity position is really predicated on the urgency of the need. So what can you do if you find yourself in one of the above situations?Ĭalculate Your Savings 5 Options When You’re Stuck With an Upside-Down Car Loan When you’ve got negative equity, you’re still on the hook for the balance of the loan, even if it’s significantly higher than the current car value. You want a safer vehicle with upgraded features, so you decide to sell.Gas prices rise, and you now need a more fuel efficient car for your long commute.You move to a new city where you don’t need a vehicle anymore.You outgrow your vehicle (Maybe it’s time for that “Baby on Board” sign).You lose your job and can’t afford your car payments.(Or better yet, you’d pay for your cars with cash.)īut, as we all know, rarely does anything in life go according to plan. In an ideal world, you’d score a low interest rate when you buy your new car, keep a steady job for the 48 to 72 months as you’re financing it, never get in a wreck, and keep your car running long after the loan is paid off. ![]() This why upside-down loans scare lenders. That remaining $2,000 loan balance doesn’t have any collateral to secure the auto loan. For example, you may owe $7,000 on your car that is only worth $5,000. If your lender ever repossessed your car for nonpayment, they could sell it to make up for the loss.īut if you owe more on your new car loan than the vehicle is worth, then it becomes risky. It’s also referred to as the collateral for your car loan. With auto loans, your vehicle secures the loan. Think of negative equity as an unsecured loan. Depending on these factors and the terms of your new loan, you could potentially drive off the lot already upside down. Negative equity happens for several reasons: if you buy a new car without a down payment, roll over an existing auto loan balance into your new loan, have a long loan term, or all of the above. On the flip side, if your car is paid off and in running condition, you likely have positive equity that you can use toward your down payment to trade it in for a new car. When your car’s value is less than the amount you owe to your lender, you have what is referred to as negative equity. A high LTV is considered high risk by lenders and can make it harder to qualify for a refinance loan or other loan product. A ratio over 100 means you owe more than the car is worth, which means you’re upside down. ![]()
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