When you owe more money on your car than it’s worth, a negative equity car loan may be your only option to get financing for a new car. These loans typically have higher interest rates and shorter terms than regular car loans, but they can help you avoid negative equity if you’re underwater on your current vehicle loan. However, negative equity car loans can be risky for people who are looking to take advantage of low-interest rates over the long term. To learn more about negative equity car loans and how to protect yourself, read this article!
What Is A Negative Equity Car Loan
A negative equity car loan is a type of financing, usually with higher interest rates and shorter terms than regular car loans, that allows you to buy a new car even if your existing vehicle has negative equity. These loans are risky for people who are looking to take advantage of low-interest rates over the long term because they can be expensive in the long run.
But for people who don’t want their credit score negatively impacted by negative equity on their current vehicle, negative equity car loans may provide an opportunity to improve your credit score with a good payment history on time.
What negative equity car loans are and how they work.
Negative equity car loans are available at the following types:
Loans that are secured to a negative equity vehicle – negative equity loans can be offered to people with negative car equity, meaning their car is worth less than what is owed.
Loans from banks, where the borrower has negative car equity – these would not be approved by banks unless it was certain that the amount being borrowed would allow the borrower to become arbitrage.
The lender takes on all the risk of the negative value of your car. The usual guarantee offered by a lender will not apply because if you default on your negative equity car loan, they might end up getting nothing back. This negative equity car loan is almost like another type of negative equity, in that it involves negative equity already.
Let’s say you buy a car for $20,000. After four years, the car’s value has depreciated to only be worth $5,000. Now, let’s say your negative equity loan allows you to borrow $6,000 against the negative equity vehicle ($15K – $9K = $6K). You would have a negative equity car loan of ($6k +$9k) = negative $3k.
Now for some reason, you cannot pay off this negative equity car loan. The lender could take back their vehicle, but they would be left negative $3k. They are not going to do this though, because the vehicle is only worth negative $5k.
In this case, you have negative equity car loan’s negative equity on top of negative equity. This is a lot of negative equity. If you can get yourself out of negative car loan debt, then try and sell your car for more than $5K to take advantage of that extra negative $3k in negative car loans (negative equity).
What Are the Side Effects Of Negative Equity Loans
Negative equity car loans have some negative side effects. One negative effect is that negative equity car loans are usually associated with a much higher interest rate. Another issue is that negative equity car loans are usually only offered in certain situations and the loan duration is very limited, which means that negative equity car loans can be difficult to get out of and may cause more stress and cause the borrower to stay in the negative equity car loan even longer.
A negative equity car loan can be really tempting for someone who doesn’t have much experience with credit or isn’t quite financially stable. It might seem like it’s a great idea if you just need something for a little while, but as soon as your situation turns around and you want to get another car, you may find negative equity car loans to be too restrictive.
A negative equity car loan is a situation where you owe more on your car than the car is really worth. You’re in negative equity because someone else does not have as much invested in the vehicle as they did when they sold it to you. Now that you know what negative equity is, let’s take a look at some of the negative side effects that can come from negative equity car loans.
Rates Are Sometimes Much Higher: One issue with negative equity car loans is the fact that interest rates for them are usually much higher than other kinds of auto loans. In many cases, negative equity car loan interest rates are over 1% higher than other kinds of car loans. One negative effect of this is the fact that negative equity car loans will take longer to pay off, which could mean sinking deeper into negative equity.
Another negative side effect of a negative equity auto loan is the fact that there are usually very few options for refinancing negative equity car loans. Like we said before, negative equity car loans often end up costing the borrower more than they could have gotten by going with a traditional car loan or even taking out a new car on their own and getting it back in their name again.
A negative equity car loan may be tempting if you’re trying to get something quickly or if you don’t think you’ll be able to make enough money in time to get your vehicle back before you need another one. Don’t let negative equity loans tempt you into spending more than you should on your vehicle or taking out a loan that could hold you back in the future.
Negative Equity Loans Make It Hard To Get Another Car: One negative side effect of negative equity loans is the fact that they can make it hard to get another car later on. If someone has negative equity on their car and it takes them years to pay off, then they are going to have some negative issues with their credit score too. A credit check for a new car will be done when one wants to purchase a new one, which means having negative equity may prevent people from getting another auto loan at all after all those years of payments.
Why You May Need A Negative Equity Car Loan
If you’re looking to get a negative equity car loan, here are some reasons why you may need one:
- You’re looking for a way to purchase an older car priced much higher than the negative equity value
- You don’t have enough savings for the purchase of your new car
- You want to repair and maintain your older vehicle
- You want to pay for car insurance
- You want to get your registration sticker renewed
Perhaps you’re trying to buy a used car that has negative equity. This might be the case if the negative equity is less than the price difference between buying a new and used car. You could also be curious about getting a negative equity car loan if you don’t have enough saved for a down payment but still want to buy the car.
As negative equity is known for increasing people’s debt, it can be tempting to seek negative equity loan help from friends and family. This decision should be based on how much risk you’re willing to take in order for negative equity car loans not to hurt you.
For negative equity cars that are ten years or newer, negative equity car loans are typically only available starting at 20% negative equity or more. For older vehicles with negative equity of 5-20%, negative equity car loans are usually available through small lender institutions as well as large ones. For these types of negative equity car loans, the interest rates tend to be quite high. The money needed for repairs and registration fees may seem too much to handle, but negative equity car loans can make it easier for you.
With negative equity car loans, you avoid the possibility of having negative residual value or negative equity in your next car. This way, all money you borrow is used only for your purchase and not to pay back negative equity on a previous loan. As negative equity car loans are paid off early, they will help lower the amount of interest that accumulates each month on your new vehicle’s negative equity. You can also use this type of negative equity car loan if you want to fix up an older vehicle so it stays reliable longer.
Have more questions about a negative equity car loan? Reach out to us at Windsor Ford and one of our finance managers or sales consultants can help diagnose issues with your loan or how to approach a negative equity loan.