What is Negative Equity? How Does It Work?
If you’re wondering “what is negative equity?” then you’re most certainly not alone. It’s one of the most common questions at every car dealership. In this article, we’ll explain:
- What it is
- How it works
- Why it can affect your next car purchase
- How Go Auto can help
If you’ve had trouble getting into a new vehicle because of your negative equity, don’t worry. We have you covered. Just keep reading.
What is Negative Equity?
Negative equity is when you owe more money on your loan than your vehicle is actually worth. But what does that actually mean? Let’s break it down.
Example:
- You get your vehicle appraised at a dealership. It is currently worth $10,000.
- You are financing your vehicle. You still owe $11,500 on your finance contract.
- If you sell/trade in your vehicle (for the $10,000 it is valued at), you will still owe $1500.
- That $1500, or the money you owe over and above the value of your vehicle, is known as your Negative Equity.
Negative equity becomes especially important when dealing with vehicle trade-ins. If you’re looking to trade your vehicle in for something else, your negative equity gets applied to the cost of the new vehicle.
So, if you have $1500 in negative equity and want to purchase a $15,000 car, your price for that car is actually going to be $16,500.
Therefore, your amount of negative equity drastically impacts two things:
- IF you can trade-in your vehicle
- WHAT you are able to trade into
How You Accrue Negative Equity
Negative equity can be attributed to a number of factors: your interest rate, the type of vehicle you purchased, how long you’ve owned your vehicle, and if you’ve been in an accident with that vehicle.
Interest Rate: High interest rates will cause negative equity early into a vehicle loan. This is because you’re paying off a significant amount of interest early on. You are paying much more of the principle (the cost of the vehicle, not including interest costs) later into your loan.
- Solution: Take the time to pay down the vehicle loan. Avoid trading in too early.
Type of Vehicle: Some vehicles depreciate faster than others. As an example, the fourth or fifth year of a specific model that’s not selling well. It would not hold its value as much as its competitors. Also, more reliable brands (Volkswagen, Honda, Toyota, etc.) hold their value longer.
- Solution: Properly research your vehicle purchase and take into consideration its future value.
Length of Ownership: Negative equity will most likely exist until the interest portion of the loan is paid off.
- Solution: Try not to trade in the vehicle until a reasonable amount has been paid down first.
If You’ve Been in an Accident: A large hit on the vehicle, even after it’s been repaired, will greatly diminish the vehicle’s value.
- Solution: Weigh the options of fixing the vehicle vs trading it in.
Choose to build equity in your vehicle by consistently paying it off over time. You will be in a much better spot when it comes time to upgrade. The easiest way to avoid negative equity is to opt for a shorter financing term. This maximizes the value of the vehicle when it’s paid off. The newer the vehicle when it’s finally paid off, the more valuable it will be.
How to Trade In a Negative Equity Vehicle
Now it’s time for the good news!
Go Auto specializes in getting people out of Negative Equity.
We have specific programs in place to combat negative equity. This way, we get you out of a vehicle you can’t afford and into one you can. One of the best ways is through the use of dealer rebates.
A dealer rebate awards the customer with money off a new vehicle’s purchase price. These dealer rebates can be used to eat away at negative equity.
Example:
- You owe $11,500 on your vehicle, but your trade-in is only worth 10,000.
- By using Hyundai’s $1500 rebate on the 2019 Santa Fe (just as a hypothetical example), your trade-in value is, essentially, now worth $11,500.
- Thus, eliminating your negative equity.
Escape Your Negative Equity with Go Auto
Go Auto has access to 19 different vehicle brands. With more than 10,000 vehicles online, we have one of the largest inventories in Canada. This massive selection provides multiple opportunities to use the various manufacturer rebates to assist with any negative equity.
In addition, we work with more than 15 financial lenders, including our own in-house finance team. This gives Go Auto a much higher chance of finding a lender that can help you with any issues caused by negative equity. We specifically specialize in bad credit situations – so don’t be worried if you’re in that boat. We have the necessary tools to get you approved when others can’t, and help keep that boat afloat.
Want to find out if it’s the right time to trade in your vehicle? Book a free trade-in appraisal at one of our 40+ locations! Or if you’re curious to see what incentives and rebates are currently available, check out our monthly deals and rebates page.
