How Paragon Honda Can Help When You Are Dealing With Negative Equity
What Does Having Negative Equity on a Car Loan Mean?
Negative equity happens when you owe more on your car loan than the vehicle’s current market value. For instance, if your loan balance is $25,000 but your car’s value is only $15,000, you have $10,000 in negative equity. This is often referred to as being “upside down” or “underwater” on your loan.
Negative equity is surprisingly common—about one in three drivers experience it. However, it makes selling or trading in your car more complicated and might even strain your finances.
What Causes Negative Equity?
1. Vehicle Depreciation
New cars lose value the moment they leave the dealership. In fact, they typically depreciate by 20–30% in the first year, and the decline continues over time. If your car loses value faster than you pay off the loan, you’ll end up with negative equity.
2. Small or No Down Payments
When you buy a car with little to no down payment, your loan amount starts near the car’s full price. Add interest and fees, and it’s easy for your loan balance to exceed the car’s market value.
3. Long Loan Terms
Opting for a 72- or 84-month loan may lower your monthly payments, but it slows the rate at which you build equity. The longer it takes to pay down your loan, the more likely your car will depreciate faster than you repay it.
4. Rolling Over Negative Equity
If you trade in a car with negative equity, the unpaid balance from your old loan may be added to the new one. This creates a larger loan that’s harder to pay off, increasing your chances of staying underwater.
5. High Interest Rates
A high-interest rate makes it harder to reduce your loan’s principal balance. This slows progress toward positive equity, keeping you in a negative equity position longer.
Why Negative Equity Matters
Negative equity limits your financial flexibility. If you want to sell or trade in your car before the loan is paid off, you’ll need to cover the gap between the car’s value and your remaining loan balance. If your car is totaled in an accident, insurance may only cover the market value, leaving you to pay the rest out of pocket. Being upside down can also make upgrading or addressing financial emergencies more challenging.
How to Manage Negative Equity
1. Continue Paying Down the Loan
The simplest solution is to stick with your payments. As your loan balance decreases and depreciation slows, you’ll eventually regain positive equity. Making extra payments toward the principal can help speed up this process.
2. Refinance Your Loan
Refinancing can lower your interest rate or shorten your loan term, making payments more manageable. While it doesn’t erase negative equity, it helps you pay off the loan faster and more affordably.
3. Pay the Difference When Trading In
If you need to sell or trade in your car, paying the difference between your loan balance and the car’s value upfront can free you from the loan. While it requires extra cash, it eliminates the financial burden of negative equity.
4. Get Gap Insurance
Gap insurance covers the difference between your car’s insurance payout and your loan balance if your car is totaled or stolen. Though it doesn’t eliminate negative equity, it can save you from unexpected costs. In New York, gap insurance is automatically included with vehicle leases.
5. Avoid Rolling Over Negative Equity
When trading in your car, resist the temptation to roll negative equity into a new loan. This only increases your debt and prolongs financial strain.
6. Save for a Larger Down Payment
Planning to buy a new car? A significant down payment can offset negative equity and help you start with a healthier loan balance.
How Paragon Honda Can Help
Dealing with negative equity can feel overwhelming, but Paragon Honda is here to make it easier. Our expert finance team understands the challenges and works with you to find the best financing options for your situation.
When trading in your vehicle, we offer competitive trade-in appraisals to maximize your car’s value. We’ll also walk you through any special incentives or discounts that could help offset your remaining loan balance.
Looking for ways to reduce your loan faster? We often recommend shorter loan terms. While this may mean a slightly higher monthly payment, it helps you pay off the principal more quickly and reduces the risk of negative equity.
Not ready to trade in? We can assist with refinancing your current loan to lower your monthly payments and make paying off the balance more manageable.
At Paragon Honda, we’re here to help you navigate negative equity and make smarter financial decisions for the road ahead. Whether you’re paying down a loan, refinancing, or exploring your trade-in options, we’ll guide you every step of the way. Together, we’ll help you regain financial peace of mind and enjoy your vehicle without the stress.
