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What is Negative Equity?
When the amount remaining on your financing agreement is more than your vehicle is worth, it’s known as negative equity. It sounds scary, but it’s extremely common. In fact, most people who buy cars have negative equity for the first year or two, even if they put 10 percent or more on the car as a down payment!
It’s when you owe more than car is worth, and it can happen later in your ownership experience too. For example, if you get into an accident and total your car but still have a loan, you might have negative equity on your car. It’s also called an upside down car loan, by the way.
The biggest challenge it poses? It’s really tough to escape the cycle when you have negative equity, especially on a totaled car or one you can’t use anymore. So what can you do?
How to Get Out of an Upside Down Car Loan
You have two choices to get out of an upside down car loan – take a loss on the car, or keep paying until the negative equity is gone. But if your car is totaled and you need something to drive, you don’t have much choice than to take a loss.
Trading in a Car with a Loan
Trading in a car with a loan is extremely common. What happens is that the dealership uses the car’s value to satisfy the current loan amount and applies any remaining value against the vehicle being purchased. When you’re trading in a car that is not paid off but is worth more than the loan value, a portion of the car’s value will be applied to your new loan – it’s called equity.
Trading in a car with negative equity is different. The dealer needs to use the car’s value to pay back the current loan you have, plus finance even more than the value of the car you want to buy. It’s tricky to make the numbers work.
Can I Sell Upside Down Car?
When you owe more than the car is worth, it’s extremely tough to sell it. See, the lender wants all their money for the car, so they won’t release the lien on the car until you’ve paid it off. If you do sell your car, you’ll still need to keep paying until the loan is satisfied in full. That means you’re making car payments and don’t even own the car anymore!
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What Happens If You Total a Financed Car
You’ve financed a car and it gets totaled. It happens, and stories of people totaling their new car on the first day are floating around. What happens in that situation?
Sadly, you’re going to have to satisfy the loan somehow. Hopefully you have insurance to cover most or all of the car’s value so it doesn’t affect you. But unless you’ve purchased GAP insurance (guaranteed auto protection), there’s probably negative equity you’ll have to pay.
What Happens If You Total a Financed Car Without Insurance?
Don’t have insurance on that fancy car you’ve just totaled? You’re in for a world of hurt. Without car insurance, you’re responsible to pay back every last penny that you still owe on your car loan, whether you can still drive the car or not. It’s the ultimate in negative equity, my friend.
Car Totaled, Still Owe, Not My Fault!
That accident wasn’t your fault, so you shouldn’t have to bear the brunt of the cost… or so you think. If you have insurance or you can successfully sue the responsible person, then maybe you’re in luck. However, you don’t have an insurer on your side to help you out, so your success in suing is all up to you. I hope you went to law school…
In most cases, you’ll never see a red penny from the person responsible for the accident. What that means for you is this: you’re stuck with negative equity.
Need to Sell a Totaled Car?
It’s not easy getting unstuck from negative equity. But you still have a totaled car that you need to deal with. You might as well get some value back from it. That’s where DamagedCars can help.
Sell your totaled car to DamagedCars, where you don’t have to fight for a fair price. Simply request a guaranteed quote online for your car in as-is condition. Once you accept the offer, you get paid in about 24 to 48 hours. We’ll pick your car up from you at no cost to you. At least that’s one less thing you’ll have to worry about. So get an offer for your totaled car instantly, get started by clicking the button below!