It’s a bad feeling when you want out of your current ride, but you owe more than it’s worth. Because all new vehicles drop in value when they’re no longer new, it happens a lot. Edmunds says 26 percent of trade-ins have negative equity that averages around $3,854. That’s a lot to roll into a new loan. If you’re upside down on your trade, here are a few tips.
Understand the Problem
When you buy a new car, most industry experts say they lose between 11 and 20 percent of their value as soon as you leave the dealership. It’s depressing, it’s not fair, but once a car is sold, it’s not a new car any more. It’s a used car, and the potential buyer pool for it is smaller. On average, five years later your car is worth 37 percent of the original purchase price.
Last year, the average purchase price for a new car was $35,000 and the average car loan was pretty close to that figure. Car buyers don’t put enough money down to make up for the inevitable first year depreciation, so they soon owe more than it’s worth.
The longer you finance for, the more likely you are to reach a point where you’re upside down on your trade. If you try to sell the car, the sales price won’t pay off your loan. If that’s your situation, identify what happened to start working toward a solution.
How to Calculate Negative Equity
First look up what your vehicle is currently worth. Check NADA, Edmunds and Kelley Blue Book, then average them to get a good idea of your car’s actual value. Then call your lender and ask what you owe. While you have them on the phone, ask if they offer any options for reducing your negative equity. Subtract your existing loan balance from your current vehicle value to find out what that negative equity number is.
Identify Your Choices
It’s frustrating to be upside down on your trade, but you have some choices. The most straightforward takes discipline but will be worth it in the end. Examine your budget to trim extras and pay more every month to reduce your principal. The more you pay each month, the faster you reduce the balance to a point where what you owe is even with your trade’s value.
If you want out of your vehicle now and you have some cash set aside, another option is to sell it privately and pay off the rest of the balance yourself. Refinancing with a lower interest rate also might help you save. Lenders tend to balk at loaning more than a vehicle is worth, but homeowners find lower interest rates on home equity loans. Community banks and credit unions also sometimes loan more than large banks.
Talk to Financing Experts
If you’re upside down on your trade, the situation might not be as bad as you think. At Velocity Mazda, we provide competitive rates and extensive financial services. We’re happy to answer your financing questions when you get in touch today.
Sources:
https://www.debt.org/credit/loans/auto/upside-down-car/
https://www.creditkarma.com/auto/i/upside-down-car-loan
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