How to Handle Negative Equity in Your Auto Loan

Have you ever come across terms like “upside down,” “underwater,” or “negative equity” in reference to loans? These all describe the same situation—owing more on a loan than the asset is worth. Although it’s not an ideal situation, it’s actually quite common, particularly with cars and homes. In this post, we’ll break down what negative equity means and provide practical steps to manage it, especially when dealing with auto loans.

What is Negative Equity?

In real estate, homeowners might find themselves upside down when the value of their home drops after purchase. For example, if you buy a home for $200,000 and owe $150,000, but the home’s market value falls to $125,000, you’re left with negative equity. A similar situation can happen with auto loans, largely because vehicles depreciate rapidly.

New cars, in particular, lose value quickly, often by as much as 20% in the first year alone. While used cars depreciate more slowly, they still lose value over time. If your car’s value falls below what you still owe—whether due to depreciation or a minimal down payment—you may end up in negative equity. This issue is especially common with deals like $0 down payment offers, which can be tempting but might create problems down the road.

Ways to Deal with Negative Equity

If you find yourself in negative equity with your auto loan, don’t worry—there are steps you can take to manage it:

• Make Extra Payments: Try to make additional payments toward the principal of your loan whenever possible. This reduces your overall debt more quickly and helps shrink the negative equity.
• Refinance Your Loan: Look for refinancing options with a lower interest rate. This can help you direct more of your monthly payment towards the principal balance, helping you pay off the loan faster.
• Keep Your Car Longer: Avoid trading in your car too soon. Instead, focus on paying down the loan while the car’s depreciation slows. Over time, this will help bring your loan balance closer to the vehicle’s market value.

If you’re eager to upgrade to a new vehicle but struggling due to a low credit score, CreditYES offers a bad credit auto loan program to help. We partner with local dealerships dedicated to helping you navigate the car-buying process. Our service is fast, free, and simple—just fill out our secure online application and get on the road in no time!

While negative equity can seem overwhelming, it’s manageable with the right approach. By planning carefully and taking proactive steps, you can work through this financial challenge and get back on track.