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Negative Equity or Upside Down Auto Loans

What does it mean to have Negative Equity or to be Upside Down in a vehicle?

If you have ever financed a new or used car, chances are pretty good that you are or have been upside down at some point. Even auto brands that have a reputation for holding their resale value (Mercedes, BMW, Lexus, Honda, Toyota, Nissan) will have negative equity for a large portion of their finance term. A lot people do not understand what it means to be upside down in an auto loan ~ until they try to sell or trade their car. In its simplest terms, negative equity means owing more on your auto loan than your vehicle is worth.

Negative equity is among the most difficult circumstances to overcome when seeking automotive financing, but it is not a completely impossible situation. There are methods and special financing options that can help all but the most buried consumers get out of their negative trade-in. If you understand how things work you may be able to qualify for a Negative Equity or Upside Down Auto Loan.

What is depreciation?

It all has to do with depreciation. According to dictionary.com, depreciation is defined as a decrease in value due to wear and tear, decay, decline in price, etc. If your new or used car is financed with an auto loan, depreciation means that you will be upside down (you will owe more than the car is worth) for a period of time. Your financed vehicle loses value faster than you can pay off the loan you have on it.

  • Financing New Cars
    New cars depreciate in value significantly, losing a substantial amount of their value (about 30%-40%) in the first 2-3 years of ownership. After 2-3 years the rate of depreciation slows down, however after five years your new car could have lost as much as 70% of its original value.
  • Financing Used Cars
    With used cars, the previous owner has usually absorbed the biggest portion of the depreciation, depending on the age of the vehicle. You buy at the beginning of the low-cost stage of the depreciation cycle, when most of the costs of owning and operating the car are reduced. However, since prices and approved auto loan amounts are based on current market value, you will still have negative equity for several years if you finance the majority of the purchase price for a longer term (usually anything more than 48 months).
  • Financing Buy Here Pay Here Used Cars
    When you finance with a Buy Here Pay Here lot, you will typically pay a premium price (more than a vehicle is worth) for an older, higher mileage car. You will also typically pay a higher interest rate, as BHPH Dealers often cater to people with bad credit and no other options for buying a vehicle. Some of the most upside down loans will be found with BHPH loans, mainly because borrowers are paying so much in interest.
  • Financing People With Bad Credit
    Bad Credit borrowers will also typically pay a higher interest rate, paying more toward the financing than toward the actual principle amount of the auto loan. Bad Credit Borrowers will be more upside down for a longer period of time than a borrower with good credit.

  • Why Would You Trade A Negative Equity / Upside Down Vehicle?

    There are people every day that find themselves in a situation where they need to sell or trade an upside down vehicle:

  • A financed vehicle that needs more repairs than it is worth.
  • A financed vehicle that needs more repairs than the owner can afford.
  • Trying to trade a financed vehicle to get a lower interest rate.
  • Trying to trade a financed vehicle to get better gas mileage.
  • Trying to trade a financed vehicle to lower maintenance costs.
  • Trying to trade a financed vehicle to lower monthly payments.
  • Trying to trade a financed vehicle in order to drop a co-signer.
  • Trying to trade a financed vehicle in order to lower insurance premiums.

  • All of these are legitimate reasons to want to trade a vehicle, whether it is upside down or not. Options are limited for negative equity financing, but there are a few choices.

    How Can You Overcome Negative Equity?

    In order to get an auto loan with an upside down trade-in, you will typically need to consider:

  • Brand-name dealerships only.
  • New cars, trucks or SUV's only (often trucks and SUV's are better, because they typically have higher rebates).
  • Auto manufacturers with a history of higher resale value (Mercedes, BMW, Lexus, Honda, Toyota, Nissan).
  • New vehicles with a manufacturers rebate (the higher the rebate the better, to help offset any negative equity).
  • If you have bad credit, seriously consider using a co-signer on your new vehicle financing.
  • Be prepared to make a reasonable down payment ~ the more the better.

  • Most lenders will require you to pay at least a portion of the negative equity in your trade-in. By using new car manufacturer rebates and dealership incentives, you can easily offset several thousand dollars of negative equity. Many manufacturer rebates are as high as $4,000 to $6,000. Depending on the time of year, dealership incentives can equal an additional $1,000 or more. Add another $1,000 or more in down payment, and you can easily burn up $6,000 to $8,000 in negative equity. With a little time and effort, you could find yourself approved for an upside down auto loan, driving away in the new car or truck that you want and need!

    Get started NOW!

    Complete our FREE, SECURE, No-Obligation Bad Credit Auto Loan Quote to get started. Let the strength of our extensive network of negative equity and bad credit auto lenders and dealerships go to work for you. Get the Auto Loan you need to get out of your negative trade-in and into your next vehicle TODAY.


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