How Paragon Acura can Help You Deal With Negative Equity
What is Negative Equity on a Car Loan
Negative equity describes when you more on your car loan than the vehicle is worth. For instance, if you still owe $25,000 but your car’s market value is only $15,000, you’re $10,000 “upside down” or “underwater” on the loan. It’s a common issue—nearly one in three drivers face it. While it’s not unusual, being upside down on your loan can create roadblocks, especially when it’s time to sell or trade in your vehicle.
What Leads to Negative Equity on a Car Loan?
Vehicle Depreciation
Cars lose value quickly, especially new ones. A new car can drop in value by 20–30% within the first year alone. If your vehicle’s depreciation outpaces your loan payments, you’ll likely find yourself with negative equity.
Minimal or No Down Payment
Buying a car with little to no down payment leaves your loan covering nearly the full purchase price. Add interest and fees, and it’s easy for your loan balance to outgrow the car’s value.
Extended Loan Terms
Opting for a long loan term, such as 72 or 84 months, lowers your monthly payment but slows equity growth. Your car may lose value faster than you pay off the loan, keeping you underwater.
Rolling Over Negative Equity
When trading in a car with negative equity, rolling the leftover loan balance into a new loan creates a larger debt. This increases the chances of staying in negative equity with the new car.
High-Interest Rates
A high-interest rate inflates the cost of your loan and slows down principal repayment, keeping you stuck in a negative equity position for longer.
How Negative Equity Affects Drivers
Negative equity limits your financial flexibility. If you sell or trade in your car before paying off the loan, you’ll need to cover the shortfall between the car’s value and what you owe. Worse, if your car is totaled, your insurance may only pay its current market value, leaving you responsible for the remaining balance. Negative equity also makes upgrading vehicles or addressing unexpected financial needs more difficult.
How to Handle Negative Equity
Keep Paying Until You Build Equity
Stick with your loan payments to gradually reduce your balance while depreciation slows. Making extra payments toward the principal can speed up this process.
Refinance Your Loan
If eligible, refinancing might secure a lower interest rate or a shorter term, reducing your overall loan cost and making payments more manageable. Keep in mind this won’t erase negative equity but can ease financial strain.
Pay the Difference
If selling or trading in is necessary, consider paying the shortfall upfront. While this requires cash on hand, it clears your loan and eliminates negative equity.
Get Gap Insurance
Gap insurance protects you if your car is stolen or totaled while you’re upside down on the loan. It covers the difference between your car’s insurance payout and the remaining loan balance. While it won’t resolve negative equity, it prevents unexpected out-of-pocket expenses.
Avoid Rolling Over Negative Equity
When trading in a car, resist the temptation to roll negative equity into a new loan. While it may seem convenient, it only increases your debt and risks repeating the cycle.
Save for a Larger Down Payment
Planning to buy a new vehicle? Save for a sizable down payment to offset any remaining negative equity and start your next loan on stronger footing.
How Paragon Acura Can Help
At Paragon Acura, we know that negative equity can feel like a roadblock, but we’re here to help. Our knowledgeable finance team offers personalized financing options to make managing or overcoming negative equity easier.
If you’re trading in your vehicle, we provide competitive trade-in appraisals to maximize its value. We’ll also explore incentives or special offers to help offset what you owe.
For customers planning their next purchase, we recommend considering shorter loan terms. While monthly payments may be higher, shorter terms help you pay down the principal faster, reducing the risk of negative equity.
Not ready to trade in? We can assist with refinancing options to lower your payments and make managing your loan easier.
Negative equity doesn’t have to derail your plans. Whether you’re looking to pay down your loan, refinance, or trade in, understanding your options is key. With guidance from Paragon Acura, you can tackle negative equity and move toward financial peace of mind.
