Dealing With Negative Equity On Your Car Loan

Dealing with Negative Equity on Your Car Loan: What You Need to Know and How to Get Out

If you’re feeling the pinch of negative equity on your car loan, you’re not alone. Many consumers are finding themselves underwater, and it can be a stressful situation. But understanding why this has happened and how to handle it can help you navigate the challenge.

Why Negative Equity is Happening

During the recent global event , we saw unprecedented demand for vehicles driven by low interest rates and limited new car supply. Many people paid amended premiums for their new vehicles as the demand dynamic spiked. But now, almost overnight, the market has shifted dramatically:

• New vehicle supply is abundant
• Interest rates have drastically risen.
• Inflation is squeezing the everyday consumer.

These changes have led to a drastic decrease in used vehicle prices as the consumer pool shrinks, and many who overpaid during the event now find themselves owing more on their vehicle than it’s worth.

Why Dealerships Aren’t Positioned Help You Right Now

Most dealers are used to working with auctions which are currently a bloodbath with low conversion rates, and many are struggling with their own extended inventory and increasing days supply. When it comes to pricing trade-ins, they often have to offer a worst-case scenario number because they don’t want to get stuck with overvalued inventory. The ease of doing business allowed them to effectively close most outlets in favor of strong auction activity. It’s simple economics where supply grossly outpaces demand. This puts downward pressure on assets that were overpaid for

• Many dealers are pricing for the worst-case scenario due to uncertainty in the market.
• Some are hoping the market will improve rather than facing reality, which leaves them underpricing trade-ins to mitigate risk.

None of this is good news for you, the seller. If you’re in a negative equity situation, you’re likely feeling stuck and unsure of what to do next. But there are steps you can take to mitigate your losses.

 Step 1: Get a Clear Picture of Where You Stand

 You have to stare into the abyss and try to make sense of it. 

Start by understanding exactly what  you’re dealing with:

• Check your vehicle’s market value: Use online valuation tools to get an estimate of what your car is worth in today’s market. (use a burner email)
• Get your loan payout amount: Contact your lender to find out exactly how much is left on your loan.
• Do the math: Subtract your vehicle’s current value from your loan payout amount. This will give you a clear picture of how much negative equity you have.

The shock might be tough at first, but knowing your exact situation will allow you to make more informed decisions and plan your next steps.

 Step 2: Prepare Financially

Once you know where you stand, you can begin preparing financially:

• Check your credit: Knowing your credit score is crucial, as it will impact any financing options available to you. You can do this at equifax.com or transunion.com
• Calculate your debt-to-service ratio: Lenders are tightening up, and prime clients with good credit and manageable debt levels will have more options available. In Canada, at most lending institutions, a score of 670 or better is considered “Prime”
• Explore financing options: If you have access to a line of credit or a home equity line of credit (HELOC), these can help you cover the negative equity without dipping into savings or taking on high-interest debt. Talk to your financial advisor to explore borrowing options that avoid penalties. 

 Step 3: Explore Your Options for Selling

Now that you have a clear idea of your financial position, here are some steps you can take to get out of your negative equity situation:

• Monitor new vehicle incentives: Certain vehicles that aren’t selling well may come with significant rebates or low-interest financing as manufacturers try to clear inventory. If you’re considering trading, this could help cover your negative equity.
• Consider electric vehicles (EVs): The EV market is expanding, and both OEM and government incentives are expected to grow. This could provide an opportunity to mitigate some of your negative equity if you hadn’t previously considered an EV.
• Look into lease takeovers: Platforms like Lease Busters can be an option for taking over someone else’s lease, giving you a way to avoid a traditional loan for your next vehicle.
• Keep an eye on tax credits: As I mentioned in a previous blog click here if you run your sale through a dealer and return to that dealer for your next vehicle, you can take advantage of tax credits on your purchase. However, if you buy elsewhere, this credit is lost. 

Step 4: Sell Your Vehicle the Smart Way

Finally, you’ll need to decide how to sell your vehicle:

• Sell privately: If you’re willing to put in the effort, selling privately can help you get more for your car.
• Work with a dealer who specializes in brokering: Not all dealers are the same. Some, like myself, specialize in brokering vehicles to other dealers or markets that are more robust. For example, I frequently sell trucks and SUVs into the U.S. or western Canada, where demand is higher. Working with a wholesaler who has access to these markets could help you get a better price.

Conclusion:

Being underwater on your car loan can feel overwhelming, but there are ways to manage the situation. Unfortunately, it’s not going to get better. By understanding your options and working with the right people, you can reduce your financial exposure and make a smart, strategic exit from your vehicle. Whether you choose to sell privately or work with a dealer who understands the market, you don’t have to navigate this situation alone. Let’s turn this challenge into an opportunity.

To Read more about me and how/why I can help you visit bobmanor.com

To get an offer on your car visit sellyourcarontario.com