How White Plains Honda Can Help With Negative Equity
Understanding Negative Equity on a Car Loan
Negative equity on a car loan occurs when the amount you owe on your vehicle is greater than its current market value. For example, if you owe $25,000 on your car, but the market value is only $15,000, you have $10,000 in negative equity. When you hear someone refer to being “upside down” or “underwater” on their car, they are talking about negative equity.
Negative equity is not uncommon; as many as 1 in 3 drivers are upside down on their loans. However, negative equity can create financial challenges for drivers, especially when they are looking to sell or trade in their vehicle.
What Causes Negative Equity on a Car Loan?
Vehicle Depreciation
New cars lose value the moment they’re driven off the lot. According to automotive industry data, new cars can depreciate by 20-30% in the first year, and these vehicles will continue to lose value over time. If your car depreciates faster than you pay down the loan balance, you’ll find yourself underwater on your car loan.
Small or No Down Payment Purchases
If you purchase a car with a small down payment or no down payment at all, your loan starts close to the vehicle's full price. With interest and fees added to the loan, it’s easy for the loan balance to outpace the car’s value.
Long Loan Terms
Longer loan terms, such as 72 or 84 months, might lower your monthly payment, but they slow the pace at which equity builds. A slow repayment rate often means the car’s value will decrease faster than the balance of your loan.
Rolling Over Existing Negative Equity
Some consumers trade in a car with negative equity, rolling the remaining balance of the old loan into a new one. This practice creates a larger loan on the new car, making it easier to fall back into negative equity.
High Interest Rates
A high-interest rate increases the total cost of the loan and slows the reduction of the principal balance, keeping you in a negative equity position longer.
Why You Should be Concerned About Negative Equity
Negative equity limits your financial flexibility. If you want to sell or trade in your car before the loan has been paid off, you’ll have to cover the difference between the car’s value and what you owe. If your car is totaled in an accident, your insurance may only cover the market value of the vehicle, leaving you responsible for paying the remaining balance on the loan. Being upside down on your loan can make it harder to upgrade to address financial emergencies that may occur.
How to Address Negative Equity
Continue to Pay Until Equity Builds
The simplest solution is to keep paying down the loan. As you reduce the principal balance and your car’s depreciation slows, you’ll gradually regain positive equity. Consider making extra payments toward the principal to speed up the process.
Refinance the Loan
Refinancing might allow you to secure a lower interest rate or shorter term, reducing the overall cost of the loan. However, refinancing won’t eliminate negative equity; it just makes the loan more manageable.
Pay Down the Difference
If you need to sell or trade in your car, you can pay the difference between the loan balance and the car’s value upfront. While this requires enough cash to pay immediately, it frees you from the loan and its associated costs.
Gap Insurance
Gap insurance is designed to protect you from financial loss if your car is totaled or stolen while you have negative equity. It covers the difference between your car’s insurance payout and the remaining balance on your loan. While it doesn’t eliminate negative equity, it can save you from unexpected costs in the event of a total loss. Gap insurance is automatically included in the lease of a vehicle in the state of New York.
Avoid Rolling Over Negative Equity
When trading in a car, avoid rolling over negative equity into a new loan. While it might be tempting to upgrade vehicles, make sure you are choosing the right option to avoid increasing your loan balance.
Save for a Larger Down Payment
If you’re planning to trade in your car, save for a significant down payment on the next vehicle. A larger down payment can offset negative equity and prevent you from being underwater on your new loan.
How White Plains Honda Can Help With Negative Equity
Dealing with an upside-down car loan can feel overwhelming, but White Plains Honda is here to help. We understand the challenges of dealing with negative equity and offer tailored solutions to make the process smoother.
When you visit our dealership, our experienced finance team will work closely with you to explore available financing options. If you’re looking to trade in your vehicle, we provide above market value trade-in appraisals to ensure you’re getting the best value. We will also discuss any special incentives or discounts that can help offset what you owe.
Here at White Plains Honda, we encourage customers to consider shorter loan terms. While they may carry higher monthly payments, shorter terms help pay down the principal balance faster, reducing negative equity more efficiently.
For those not ready to trade in, we can assist with refinancing your existing loan to potentially lower your monthly payments and make it more manageable to pay down the balance.
Negative equity on a car loan can be challenging, but it’s manageable with the right approach. By taking proactive steps and exploring your options with our team, you can safeguard your financial stability and enjoy stress-free driving.
