Structuring a Loan When Negative Equity Is Involved
No one wants to be in a negative equity situation with their auto loan, and especially not with a large loan for something like a recreational vehicle. This post breaks down what exactly it means to be “upside-down” and how Finance Solution can allow for loans in these situations.
How to Trade in a Car With Negative Equity
Many lenders or dealerships who offer direct financing will refuse to approve a loan involving a trade-in if the vehicle being traded has negative equity. Inherent in this proposition is a greater risk on the part of the lender. By accepting a trade-in with negative equity as a component of lending terms, a lender is essentially guaranteeing that the new purchase will also go upside down.
But, let’s back up. What exactly is negative equity, what does it mean to go upside down, and are there ways to mitigate risk and get loans approved? Essentially what we’re trying to figure out here is: Is a buyer simply out of luck?
What Is Negative Equity?
The concept, like many in the world of finance, is simpler than it sounds. Negative equity results when the value of an asset, such as a home, car, RV, or another type of property, is lower than what remains of the loan. This can result from a number of factors.
An easy example is in the housing market. If we imagine someone bought their property for $200,000 and then the next day the market crashed, they would likely be in a negative equity situation. This is known as going “upside down.” In this situation, if the new value of the home is $150,000, selling the property would mean that the owner would still end up owing money toward the loan.
To refocus on the vehicle market, we can imagine a situation where a buyer purchases a vehicle and signs on to a long-term loan. Vehicles are some of the fastest types of property to depreciate in value. Because of this fact, they are vulnerable to going upside down because the money being paid toward the loan often does not outpace the depreciation value.
Used vehicles, as anyone reading this probably knows, are commonly used as a trade-in when purchasing a new vehicle. This is as true in the case of boats or recreational vehicles as it is with a new daily driver.
Upside-down car loan trade-ins are often not possible without a team of financial experts on your side. When dealerships partner with Finance Solution, they can facilitate more purchases.
When a buyer is trying to use their upside-down vehicle as a trade-in, lenders would be taking on a larger risk than under normal circumstances. This all comes down to a buyer’s ability to pay. There are two approaches that can be taken when a vehicle is upside down.
Two Loans: Although it’s by no means ideal, a buyer could potentially take on two monthly payments—one for their existing vehicle and one for the new purchase. Buyers usually have to resort to this tactic when a lender will not approve a large enough loan to cover the remaining payments on the upside-down vehicle. For the buyer’s sake, this is generally not advised. Unless the negative equity on the existing vehicle is low, an extra monthly payment could be dangerous over a long period.
The Upside-Down Trade: A trade-in negative equity car is a difficult sell. But the experts at Finance Solution have the skill to structure lending deals that are favorable to the lender, the customer, and the dealership. By leveraging our relationships and negotiating skills to help create favorable lease terms, our team can generate agreements that cover the rolled-over cost of the upside-down trade and the new purchase. The benefit here is that all of the payments are rolled into one loan.
Can You Refinance a Car if You Are Upside Down?
The short answer is: yes. It is possible to refinance a car to get out from under an upside-down loan. Refinancing from another provider could put you in a better position, but it is important to remember that once you refinance, interest payments start over from the beginning.
It may be a better idea to use your car as a trade-in instead. Fortunately, Finance Solution has the expertise to facilitate this type of transaction where other providers might not offer the stamp of approval.