How to Get Out of an Upside Down Car Loan
To get rid of your auto loan's negative equity, you could pay it off all at once, out of your own pocket. For example, if you owe $12,000 on your vehicle and the dealer offers $10,000 for the trade-in, you would make up the $2,000 difference to your lender.
Do you owe more on your auto loan than your car is worth?
Negative equity occurs the loan is greater than the value of the vehicle. Trying to refinance a car with this is generally only possible if you have good credit. In other situations, institutions aren't willing to explore car loan options where the vehicle is worth less than the loan.
How to Get Out of a Car Loan
While the dealership is able to pay off your original car loan, you're starting out your next auto loan in a negative equity position. The negative equity on your first loan doesn't simply go away, it's just added to the price of the next financed vehicle.
Attempting to hide negative equity is a form of auto fraud. The dealer may show on the contract of purchase that the amount of payoff is the same as the trade-in value, but then increases the purchase price to cover the negative equity.
CarMax will buy your car even without you buying any car from them. If you're “upside-down”, then you'll have to write them a check for the difference. CarMax will then pay off your loan.
This means that your vehicle's loan shouldn't exceed more than around 125% of it's value. Since rolling over negative equity means adding to the total balance of your next auto loan, depending on how much negative equity your current car has, it could exceed that common 125% rule.
One option is trading in your old car during the process of buying your next vehicle at a dealership. ... If you still owe, the dealership takes your old car, pay the loan balance to assume possession of the title, and then it's theirs to resell. The dealer takes care of all the paperwork for you.
Here's an example… If your current vehicle has $10,000 in negative equity and your new car costs $20,000, you will take out a $30,000 loan from the lender. $20,000 will cover the cost of your new vehicle, while $10,000 will cover the negative equity on your trade-in.
Negative equity is when you owe more on a vehicle than its book value. ... Gap insurance covers negative equity in most cases of loss, but it may limit coverage depending on certain factors, such as the amount you put down on a new loan or the length of the loan term.
There are a few special programs that you may be able to use to refinance a loan with negative equity. You may be able to use Fannie Mae's High Loan-To-Value Refinance program if you have a conventional mortgage. A High LTV Refinance can allow you to refinance a loan when you owe more money than your home is worth.
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