What is Negative Equity on Car Loans and how to get out of it

Negative Equity on car loans – A term that most of you might not have heard about but we are sure you must have seen a person or a firm in this situation in your real life. Earlier this week, we wrote an article on long term car loans. But first, if you haven’t subscribed to our blog yet? Make sure you hit that bell icon right now as we bring to you such pieces of information which make your car buying and driving experience, a simple and easy one!

For those who have already read our article on long term car loans, you would already know the verdict but if you haven’t you need to go through that article before you start reading this article.

Here it is: Getting Long Term Car Loan or Finance | Wise Decision?

Considering that you have now read the above-mentioned article, we proceed with the main topic of this article that is negative equity on car loans and how to get out of such a situation! For all those readers who asked for this article, read it till the very end!

What is negative equity on car loans?

As seen in the picture above, it is really simple to understand what negative equity on a car loan is.

Negative Equity is a situation where your car’s present value drops down to a lower value than what you still owe to the bank!

Yes, this is a common situation in long-term car loans and the math is simple. Your car’s value depreciates faster than you think! The growing popularity of long-term car loans makes people pay less than 20% of the car’s value as down payment and hence, important factors like an upside-down situation go unnoticed!

Using your car as a trade-in to avoid Negative Equity

Schemes like these where the automaker ensures you that they will pay off your existing car loan while you drive out in a new vehicle from their showroom is not really a bright idea.

Trading in your car with negative equity is not worth. It’s a big NO from our side! Many auto experts would suggest you buy a car with rebates and discounts to overcome the upside-down situation.

If you are in a situation of negative equity your car loan and buy a new car, no matter how many discounts it may come with, your equity will only get transferred from one vehicle to another and that won’t help you out in any manner! Metaphorically speaking, it is like fuelling the flame instead of putting it down. If you are using this practice by following the advice of an expert, stop right there! or you might land into more trouble 5-6 years ahead in the future.

Tips For Existing Car Owners

In case you have already bought a car on a long-term car loan, the best advice would be to use it and keep paying the loan EMIs until you own the most part of your car or own it completely. In case you land in negative equity on a car loan situation, you can also use alternative methods like paying off the loan using your savings. Hold to the same car at least till the time when the remaining debt is lesser than the present value of the car. At least by then you will have major equity in your vehicle and would be owing less to the bank.

Also, if you can, you should ask your bank for permitting you to pay a higher EMI (if you can afford it) so that your long-term car loan isn’t that long anymore! But if you are only into an upside-down situation, it is high time that you should use your savings to pay off your loan. believe me, it is the wisest and the simplest thing you can do to overcome such a situation.

Tips For Potential Car Buyers

In case you haven’t bought a car yet and fear a negative equity situation in the future, don’t let those small EMIs attract you! In case you don’t want to settle for less, you can get the car you want from the used car market.

Yes, the used car market in India is growing at a rocket pace and you can find cars which are as new as showroom vehicles if you dig deeper inside the market. These cars are available at a price of almost 20% less than what the showroom would provide you for a new car. We agree the interest rates on a used car loan are higher but the minimum 20% savings on the cost I mentioned above would land you in a favourable situation anyhow.

Read 10 Not-To-Buy (Worst-Rated) Second-Hand Used cars in India

How to get out of negative equity on a car loan?

• Selling Your Car
  

  

  This is another method by which you can get rid of the negative equity situation on your car loan. Let’s say you still owe ₹2 Lakh to the bank and your car’s current market value stands at ₹1.5 Lakh. The best you can do is sell your car to a private buyer rather than selling it to a dealer. Selling your car to a private buyer always yields you more money than a dealership would offer you.

  Considering the above example, if you get ₹1.5Lakhs for your car, you would be left with only ₹50,000 as debt which you can easily pay off. At least it is easier than paying off ₹2Lakhs. If you are hopeless about your situation then this would be the best option as you can then ask for a small amount of money from a relative/friend or alternatively save more on your commute by using public transport because your car will already be sold! You can definitely save for your next car by saving on fuel expenses.

• Re-Financing the loan
  

  

  Another way you can get out of the negative equity on the car loan situation is by talking to your bank! Yes, interest rates get revised every then and now. If you spot a lower interest rate, then ask your bank to lower it down for you too. You will definitely face rejections but some or the other bank will help you for sure!

  Also, you can get your car loan re-financed into other loans which have a lower interest rate already. For example, a home equity loan. Another tricky way out of the situation can be transferring your loan amount to a new credit card company who is offering 0% interest as an introductory offer or due to any other reason. This way you will easily get 12-18 months without having to pay significant interest.

•  Debt Consolidation/Settlement

  

  Another way out of such a situation is again going to your bank and talking to them about other options. If you consolidate your debt, your debt can be settled with another loan that you have already taken or are about to take in the near future. This way you will feel comparatively light as you will be under the debt for one loan instead of two of them eating up your savings together.

  Yet another way out is debt settlement where an agency can talk to the bank in your place and can settle to an amount with mutual decision and agreement. If the situation is worse, you can also file a case for bankruptcy but make sure the firm you consult is an experienced one.

How do people land in negative equity on a car loan?

This is not a common situation and everyone doesn’t land into such things unless the car deal is planned and executed well. Here are a few aspects that may land into an upside-down situation:

• Inadequate Market Research
  

  

  This is a situation where the customers don’t do enough research on cars and their competitors. If you are getting all the specs and features for a price cheaper than your potential car, you need to re-think your decision!

• Planning the Finances
  

  

  Planning the finance is a situation where you consider real-world metrics. For instance, a car will most probably depreciate at 20% of its value per year. If you are not paying at least 20% of your car’s loan amount in a year, you need to rethink your decision!

• Needs vs Luxuries
  

  

  As you go higher in the lineup, you will definitely find more features but it’s you who gets to decide if you actually want that! If you go for an upper variant or added features, the price of the car will increase and so will the debt!

• Rollover loan
  

  

  IF you have an existing loan on your car, it’s not the right time to buy a new one. Dealerships might insist you to plan a rollover loan but you need to rethink because it is you who will be re-paying a higher loan amount and hence a higher EMI!

This was all for the negative equity situation in a car loan. I hope I was able to clarify all the doubts related to the topic and was able to tell you how to get out of such a situation if you get into it anyhow. Share this article with all those looking to buy a car and considering finance options.