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How Negative Equity Affects a Car Loan

How Negative Equity Affects a Car Loan

You want to buy a new car. A brand new Acura MDX would be ideal but you’d be extremely happy with the Acura RDX as well. The trouble is that you already have a car, and you didn’t buy it all that long ago. You’ve already fallen for the Acura of your dreams so you have to try to buy it, don’t you? You’ll have a big hurdle to get over though, and it’s known as negative equity.

What is Negative Equity?

When you own a car outright – without a car loan – it has value. Its value is known as equity. But when you have a car loan outstanding on it, it cuts into the equity. As long as your car is worth more than the car loan, you have equity. If it’s the other way around and your car loan is more than the car’s value, it’s negative equity.

How Does Negative Equity Happen?

It happens in a few ways, usually starting with a scenario like you just read. In the first year or two of car ownership, your car depreciates at a rate faster than your car payments lower the loan amount. Then it balances off, followed by building equity.

If you choose to sell your car or trade it in before your car’s value is equal to or lower than the loan, the negative equity has to go somewhere. Lenders often can add it to your next car loan, but that’s seldom a good idea.

How to Avoid Negative Equity

Wait to Buy a New Car

The best idea is to simply wait. Adding negative equity to a new car loan could get you further into hot water and even further ‘upside down’. If you have the option to, put off buying a new car until you have equity in your car.

Put Money Down

Any money you put towards a down payment cuts your car loan down. You don’t start with negative equity or, at least, not as much. It takes less time to get to an equitable position, and that means you can afford to trade in your car on a new Acura sooner.

Lease a Car

Sometimes, it’s possible to add your negative equity to lease payments. If that’s the case, you can get yourself out of trouble a little easier. Your lease payments will be a little higher, but you’ll have the ability to change up cars easily when your lease matures.

 

If you just don’t want to wait, Jay Wolfe Acura will work with you. We can help figure out your negative equity situation by sorting out your options with you.

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