If the balance of your car loan is higher than the vehicle's current market value, you have a negative equity car. This means the proceeds from selling your car generally won't cover what you still owe on the loan. It can be difficult to get rid of a car with negative equity, but there are financing arrangements and sale options that will help you do it.
Pay the Difference
The simplest way to deal with a negative equity car is to fork over the difference between what you owe and what you can sell the car for. For example, if you can find someone who will buy your car for $5,000 and you have $6,000 left on the loan, supplement $1,000 of your own cash to completely pay off the rest of the loan. If you can't pay the difference right away, wait a month or two -- the car payments you make will partially decrease the principal left on your loan.
Incorporate It Into a New Loan
Car owners looking to trade in a vehicle for a new one may be given the option of rolling over existing debt into a new car loan. For example, say the trade-in value of your car is $4,000, you have $6,000 left on the loan and you want to purchase a $15,000 car. The auto dealer may allow you to tack on the difference between the trade-in value and the loan balance -- in this case, $2,000 -- and issue you a loan for $17,000. However, you may need to take on a longer-term loan to do this, which means you'll pay more in interest over the life of the loan.
Roll It Into a Lease
If you like the idea of rolling over your debt into a new loan but don't want the commitment of a car, consider taking on a lease. As with a car loan, lenders will often allow you to roll over some of your existing debt into your lease payments. Lease payments tend to be lower than car payments and down payments can be smaller. However, at the end of your lease term, you don't own the car. Most lenders offer a buy-out option after the lease term expires but you'll pay more in financing and interest charges compared to simply buying the car outright
Ask For a Short Sale
If you simply cannot manage your monthly car payments any more, talk to your lender about a short sale. In a short sale, the lender agrees to an immediate cash payment of less than the existing balance of the loan. If you can prove dire financial hardship, some banks and credit unions will offer loan modifications and short sales. To avoid having the bank repossess your car, contact your lender at least 30 days before you think you'll have to default on a payment.
