Steps to Take If You Have Negative Equity on Your Car

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A car does not grow in value like a house. As a result, it’s very possible to to have negative equity on your car. Specifically, this is when you owe more money on the car than its actual worth. A car depreciates in value by around 10% even after you drive it off the lot, and it continues to depreciate after every use. Unlike a property, which can rise in value even without modifications, a car will very rarely increase in value without further investments into it.

Purchasing a car can also present various risks from the get-go. If you overpay for a car to begin with, the chances of eventually having negative equity on it are higher. If it’s too late and you already have negative equity on your car, there’s no need to fear. There are several steps you can take to help resolve the situation.

See If You Can Afford the Monthly Payment

Your monthly car payment is the primary concern for those with an upside down car loan. If you’re able to pay it on time, then it’s not a big issue and will eventually be paid off. However, this isn’t always easy. Unemployment or job loss combined with negative equity on a vehicle can put you in a bad situation.

Before considering steps to counter negative equity, it’s worth evaluating your own financial situation to determine the likelihood of paying the loan off. In many cases, it’s better to simply pay off the car in monthly installments until it’s paid off, though there are several viable alternatives as well.

Use a Credit Line

Becoming reliant on credit cards is a big no-no for personal finance. However, in the case of excess car debt, it’s a very realistic option. If moving to a credit line, you have to be absolutely certain that you can afford the monthly payments, or you will incur additional fees. Look to get a credit line with low introductory APR. Some cards offer 0% APR for the first year. If this is the case, do your best to pay it off within that year. At least with moving it to a credit line, the issue won’t be as pressing, especially if you’re deciding between groceries and your car payment.

It’s also worth consulting with a local credit union to see if they can provide a good personal loan. Peer-to-peer lending networks are another alternative, as are applying for a rollover loan, which can eliminate negative equity depending on the incentive.

Sell Excess Items, or the Car Itself

Look around your house or apartment for luxuries or items you don’t use frequently. Perhaps you have a gaming console you don’t play much anymore or a dress that you bought a year ago but never fell in love with. These are prime items to sell in the hopes of building up equity to pay off your car. Sites like eBay and Craigslist make selling items like these easy. Plus, it helps de-clutter your space.

It’s also worth considering selling the car itself. Although it’s unlikely you will net enough to cover the entire overage, it’s worth considering if it’s close enough. For example, if you owe $9,000 but get an offer for $7,000, it may very well be worth selling and taking public transit for the time being. Covering $2,000 without a car may be easier than covering $9000 with a car, depending on your lifestyle.

Work Part-Time

Even though you may feel exhausted after a long shift at work, if you’re in a rut with car payments, it’s worthwhile to get a part-time job. You can use this job’s profits to spend exclusively on the car payments. There are an abundance of part-time retail and telecommute jobs, ranging from copywriting to graphic design, that you can engage in depending on your skillset. Various employment guides can provide listings for available jobs and job fairs.

In the future, you can help avoid this problem by not purchasing a loan at all. Sometimes a car is necessary, though if you can manage without it, there’s no need to take out a loan. Paying more than the minimum each month and keeping up with car maintenance are other suggestions for avoiding negative equity situations in the future.

By Guest Contributor: Anum Yoon

Anum Yoon is a personal finance blogger who started Current on Currency. She hopes to empower people to take control of their own finances. Sign up for her weekly money newsletter here.