How You Can Deal with Negative Equity
There’s a problem that plagues hundreds of thousands of car owners. It’s a financial issue that can be a real burden. It’s known as negative equity, and it can happen to virtually anyone who buys a new or used car.
What is Negative Equity?
Simply stated, negative equity is when you owe more on your vehicle than what it’s worth. Most commonly, it happens to customers who buy new cars with no money down. Here’s what happens:
- You choose a vehicle and make a deal.
- You finance the whole purchase price, or possibly with a small trade-in or down payment amount.
- Your new car experiences depreciation immediately, beyond the down payment or trade-in value.
- You now have negative equity; your car loan is for more than your car’s current value.
Even if it’s a Toyota that maintains its value better than most, it can take two years or more until your car loan is equal to or less than your loan amount.
Negative equity isn’t a problem, though, until you need to sell or trade in your car. If that’s the case, you might still be able to buy a different vehicle but you’ll have to figure out what to do with your negative equity.
You Can Pay the Difference
The easiest way to get rid of the balance owed is to pay it off in full. Most people will find this isn’t a viable method because it requires you to have cash on hand.
You Can Finance the Difference
Most times, you can wrap your negative equity into your new car purchase. Most lenders allow for a small amount to be added to a loan for this reason. Beware, though. This will lead to an even deeper negative equity situation for a while.
You Can Lease Your New Car
Like financing, you can add your negative equity to your lease payments. It results in higher payments for your lease term. But at the end, your free and clear.
You May Want to Wait
Often, if you’re able, you might want to hang tight to buy a different car. Wait until your car is worth the same or more than the money you owe on it before you trade in or sell.
If you need to act now, Jay Wolfe Toyota of West County can help. We’ll work with you to get you into a new or used Toyota and help you out of your current negative equity.