As car dealerships find innovative ways to make more people buy their new cars, it is now becoming more common to find people with negative equity. Factors like small or no down payment, high-interest rate, roll over and longer loan terms are some of the things that can make people have negative equity.
You will have negative equity if the loan balance is bigger than your car’s resale value. Negative equity also goes with other terms like upside-down or underwater.
Being upside down is not a big issue unless the vehicle is declared a total loss by insurance, stolen or you want to replace it. You should review your auto loan balance and the resale value before you can start shopping for a new car, as the state of your equity will affect how you can sell your car.
Selling an upside down car to Carmax is a popular way you can dispose of your car with negative equity. This article will help you understand upside down and how you can sell an upside-down car to Carmax.
Is An Upside Down Car Loan A Bad Thing?
Almost all people have an upside car loan at some point in their loan life. An upside-down auto loan is not necessarily a bad thing and you will not even notice as long as you are paying the loan as agreed with no missed payments.
Negative equity is highest immediately you drive the car from the dealership due to high depreciation. If you have a $15,000 vehicle loan balance while your car’s worth is $12,000, you are $3,000 upside down.
Although most people will not notice the impact of an upside loan, there are situations when you would not want to have negative equity. An upside-down car loan can be problematic under the following scenarios:
You want to sell the car
Most people will know they have an underwater loan when selling their car. An upside-down loan makes it difficult to sell your car as it adds complications. In a normal situation, the amount you sell your vehicle should be able to clear your loan balance, but that is not always the case. In an upside-down situation, the amount will not be able to clear your loan and you will still have to think of how you will settle the remaining balance.
You will not be able to sell the car unless you clear the balance as the car is the collateral for your loan. Selling an upside-down car to Carmax is a popular way to navigate the problem. You may also choose to roll over your balance into your new auto loan.
Total loss after a crash
The worst of an upside-down is when an insurance company declares your car a total loss after an accident. The insurance provider will only pay the market value and not your total loan balance. Despite the insurance compensation, you will still be left with an amount to clear.
The financial institution can recall the remaining balance immediately as you no longer have the collateral. In such a case, you will not only have to worry about the car loss but also deal with stressing payment demands by the lender.
You can no longer make payments
Inability to make your monthly payments due to job loss and illness other economic factors will put you in a difficult situation. If you lose your job with positive equity, you can sell the car and clear the loan. Unfortunately, the amount from the car sale will not be adequate to pay the loan and you will still have to look for other ways to raise cash.
Factors That May Cause An Upside Down On Your Car Loan
1. You put a small or no down payment
You can easily buy a car without a down payment or a trade-in. While the flexible payment is good for those without substantial saving or a trade-in car, it means you will be upside down the moment you sign up for the dealership paperwork.
When you buy a new car, its value depreciates rapidly. The early loan payments usually do not keep up with the rapid decline of an auto loan, putting you in an upside-down status.
Offering a substantial down payment puts you well ahead of the depreciation curve, ensuring that you will not have negative equity. Trade-in also works the same way as the value of the car you are selling functions as the down payment for your new auto loan.
Furthermore, a down payment can help you negotiate a better interest rate and a shorter loan term, reducing the cost of your loan. Trade-in or a down payment makes it easier for your monthly payments to keep up with your car’s depreciation.
2. Rapid car depreciation
Although all new cars depreciate quickly the moment they leave the dealership before they level off, some models and makes continue to depreciate rapidly for the first couple of years. Furthermore, the biggest percentage of your early monthly payment covers the interest rate and not the principal amount.
The combination makes it difficult for buyers to keep up with depreciation or gain positive equity during the early years of the loan. The problem becomes more critical if the car cannot hold its value well. Market conditions and technical aspects like engine problems can make a car value decline steeply as the resale value decline.
3. A longer loan payment
While a longer loan will make the monthly payments affordable, it also means that you will have to pay more over time. Furthermore, as cars become more expensive, dealerships are offering long-term loans to make them affordable to most buyers.
Unfortunately, a longer loan term makes it impossible to keep up with depreciation. Although it is possible to buy an SUV with affordable monthly payments over eight years, the payments will not keep up with the depreciation. Always opt for the shortest loan you can afford.
4. High-interest rate
Sometimes getting a vehicle with a higher interest rate is the only way you could get a car, especially if you have bad credit. Sadly, a higher interest rate means that most of your monthly payments go towards paying interest and not the principal.
Always negotiate for a lower loan interest before you buy a car. It is a good idea to shop around from different lenders to ensure that you have the best possible loan terms.
5. Negative equity rollover
Negative equity rollover is a trick most dealerships use to make a car trade-in less complicated when you need to purchase a new vehicle. The dealerships that promise to pay off your current loan to enable you to get a new car will rollover your existing balance into your new loan. A roll-over puts your car loan upside down even before you drive from the dealership.
For example, if you have negative equity of $2000 and your new car price is $20000, the dealership will offer a loan of $22000 to cater for the negative equity. Rolling over your loan can make it more expensive. You should avoid trading in your car until you have positive equity.
6. Financing fees and extra costs
Every auto loan has associated fees and costs that can make your payment more expensive. Some lenders may not disclose all associated fees and will only sell you the interest rate and duration. The extra fees vary from one lender to another and may include add-ons like extended warranties, window etching, protection packages, and insurance products.
The fees will add to the cost of the car and increase your likelihood of an upside-down loan. Always review the costs and fees associated with your car loan before signing the contract. If it is possible, you should pay the fees upfront as including them on the loan increases your chances of an upside-down loan.
How To Sell An Upside Down Car To Carmax?
Selling an upside-down car is not easy, especially if it is not a trade-in due to the remaining balance. Since the car’s value is lower than the remaining loan balance, you will still have to mind about clearing the balance as the lender will not release the car documents until you clear everything. If your car is upside down with $5000, you will have to raise the amount from your savings or take an unsecured loan.
However, if you do not have a way to raise the balance, selling an upside down car to Carmax remains your most feasible option. Carmax gives you a one no-hassle appraisal offer, allowing you to walk out with payment in your hand. You also do not have to buy a new car with Carmax for them to buy your car.
If you have a loan balance on your car, Carmax will contact the lien holder to facilitate a payoff. Carmax will need the lien holder’s name, contact information, account number, and Social Security Number (SSN) to make the payment on your behalf.
If you are selling an upside down car to Carmax, the company can include the balance on your financing when you buy from the dealer. In a situation where you are no interested in buying a new car, Carmax will calculate the difference between the loan balance and their offer and request you to pay Carmax directly.
How To Protect Yourself If Your Car Loan Is Upside Down?
You do not want to run into trouble when you are upside down. Also, you should make your monthly payments in full and on time to avoid falling behind on your payments. You will not have any trouble with the lender as long as you are making payments on time and as agreed. The challenge is when you fall behind the payments and the lender repossesses your car.
If you fail to make monthly payments, you will attract additional fees or lose the vehicle. Also, if the lender takes away the vehicle, the remaining balance will become due, putting you in a difficult financial situation.
If it is possible, you should pay the monthly payments and add a little more every month. The goal should be to make your monthly payments outpace the depreciation of your car and thus, help you build positive equity. You can also opt for gap insurance to protect your finances. Gap insurance protects your finances by paying the difference between the car’s value and the amount you owe in case of theft or a total loss.
In a situation where the dealer offers gap insurance coverage, you should not accept the offer without comparing it with policies from other providers. You could save money by bundling gap insurance with other insurance covers. However, you will need to note that gap insurance will not cover the negative equity if you decide to sell the car.
Brilliant Ways You Can Fix Your Upside-Down Loan
There are several ways you can fix your upside-down loan, but the best option will depend on your preference and situation. The best ways to get out of an upside-down auto loan include:
- Continue to pay your loan – You will most likely have negative equity during the early days of your loan due to the rapid depreciation. You will need to continue making your payments until the loan levels of, which can take up to two years. However, you can get to positive equity quicker by paying extra money above the monthly payments.
- Sell your vehicle privately – You will always likely get better offers when you sell privately. If your car is in a good state, you can get an amount that is closer to your loan balance.
- Refinance your car – You should consider refinancing your vehicle if you can get a cheaper loan. Economic changes or a better credit score can help you qualify for a lower interest rate that will help you pay off the principal amount quicker.
- Look for a rebate – A new car deal with a huge cash offer can help you reduce your negative equity while also allowing you to drive a new car.
You should avoid situations that will result in an upside-down car loan as it will negatively come into play when you need to dispose of the vehicle. However, if you are already underwater, selling an upside down car to Carmax is an effortless process whether you intend to buy a new car or not. You only need to take your paperwork, keys, IDs, and remote fobs to sell your car at Carmax.