Having a car loan with a negative equity is bad news every day of the week, but it is particularly dangerous when you consider trading a different vehicle. Fortunately there are ways to get out of trouble.
Why negative stocks are toxic
A negative equity means more due to a car’s value. Suppose someone buys a brand new SUV for $ 50,000, take advantage of the easy special offer to roll the ticket with only $ 2,000 less, and therefore owes $ 48,000. Because the buyer wanted low monthly payments, he opted for the longest loan he could get.
Unfortunately, new vehicles are written off quickly. A year later, the value of the SUV dropped to $ 42,000, but the debt is now $ 45,000 because the small monthly payments have not kept the depreciation. This car owner has $ 3,000 in negative equity.
Having a debt surplus is always a precarious situation, but the real problems come when the poor juice in our example decides that the SUV was not good for him anyway. He brings it back to the smiling dealer, who is more than happy to trade in the SUV and sell him a new sedan instead. But since the SUV was $ 3,000 under water, that debt is rolled into the new car loan for the sedan, which could mean you start with a negative equity before you leave the plot, and dig an even deeper hole when The debit on the new car starts its toll requirements. Adding an injury can also mean that less favorable conditions are imposed on the new loan, because the collateral does not fully cover the loan.
Simply put, things have gone from bad to worse. So what’s the best way to handle a negative equity credit?
Option 1: sit tight
The simplest option is to give up the idea of trading vehicles and keep the current for a few more years. This has several advantages. To begin with, the rate of depreciation in actual dollars becomes slower as the car gets older. The big fall has already occurred; Subsequent depreciation takes place at a much slower pace, so that monthly payments start to catch up to the actual value of the car. Every month that passes is one step closer to break-even, without the buyer having to lift a finger.
Sticking to the plan also looks better on a credit report, especially as the balance is getting smaller. This increases the credit score of the car owner and gives better conditions to everything where credit is a factor.
Option 2: pay the difference
If the need for a new vehicle is serious and the current model is simply not an option, it is time to investigate whether it is possible to peel enough to cover the negative equity. After all, unless we are talking about super luxury vehicles, the negative equity is probably only a few thousand dollars.
If we cover the equity gap, the worst of the problems we described earlier are differentiated, assuming it is done right. Thinking the difference in ways that aggravate the overall economic situation, such as taking a large advance on a credit card, is a clear no-no. But if there are assets that can easily be handed over, such as unused jewelry or a boat that collects cobwebs in the driveway, this is the time to unload them and use that value properly.
Option 3: Sell the car elsewhere
It may be useful to trade in the car in the car, but it is not how you can get the best possible price for it. Placing the vehicle oTopsyin and putting notes on local bulletin boards is a bit of a hassle. The sales process is cumbersome, especially with a pledge on the title. But if the end result is a few thousand more than taking the easy way, meaning that the negative capital on the loan is fully paid off, isn’t it worthwhile to jump through a few hoops?
Option 4: find a new car with a big discount
The last option depends on finding a good deal at the right time, with the manufacturer offering special incentives to clear inventory. Suppose the new car has a $ 3,000 discount and the old underwater car is $ 2,000. Although it will not be such a good deal, because clearing up negative equity will eat the most discounts on the new car, the new loan does not start in the red. Note, however, that such discounts tend to accelerate depreciation in subsequent years. If you opt for a shorter period and slightly higher monthly payments, you prevent a decline in negative equity.