Rolling Negative Equity Into An Auto Loan: Is it a Bad Idea?
Unlike other loan types, the balance of a pre-existing auto loan can be rolled into a new auto loan.
If you owe $13,000 on your vehicle but want to move on, there is certainly nothing stopping you – not even the fact that your car is only worth $12,000 in a trade.
But is rolling negative equity into an auto loan a bad idea?
Probably, but there are ways to lessen the blow.
Avoid a Negative Equity Situation By Refinancing Early
High interest rates can contribute to negative equity situation.
Let’s use a vehicle with high depreciation as an example.
For a $20,000 vehicle with a 20% down payment ($16,000 loan spread over 5 years) and an interest rate of 5%, you will pay $2,116 in interest charges over the life of your auto loan.
Interest charges will naturally be higher in the first few years of vehicle ownership than later on. After just one year, $790 of that $2,116 in interest will have been charged on the loan.
Along with upfront depreciation, and the higher interest charges, the remaining loan balance will be near $13,000 after one year, despite the fact that the car itself may only be worth $12,000.
In this instance, a decision to move on from the vehicle – for whatever reason it may be – a growing family, work needs, better fuel mileage or more horsepower - may not be in your best interest.
You can refinance an auto loan at any point in your ownership of the vehicle (even right after purchase). There is a good chance that a better auto loan rate could help you avoid rolling negative equity into an auto loan down the road.
Refinancing early on at a rate of 2.49% could help keep your loan above water – or at least much closer to the surface.
Avoid a Negative Equity Situation by Purchasing GAP Insurance
Most vehicle owners will hold onto their vehicle for longer than the year in the previous example.
Many loans, particularly those with a low down payment, start out below water and have to work their way back up over time. If you plan to drive your vehicle for five, even 10 years, those plans can quickly shift in the event of a total loss accident.
GAP coverage can help vehicle owners breathe easy if they happen to total their vehicle with a higher remaining loan balance than the amount insurance is willing to pay out.
When you refinance a vehicle with CARS, we offer the chance to purchase a 100% refundable GAP insurance plan featuring a deductible reimbursement up to $1,000.
This way, if you have to prematurely move on from your car following an accident, replacing it won’t be an issue.
Be Smarter About Your Auto Loan – Refinance with CARS Today
There is no good reason to be stuck with a rate any higher than you deserve. CARS offers auto refinancing rates as low as 2.49% and the opportunity to get out from beneath your bad loan – saving money each month and over the life of your loan.
Fill out a no-obligation application today and get started towards a brighter future with CARS!