If the value of your current vehicle is less than the amount you owe, you have a negative equity on your car. This is also referred to as being upside down on your car loan. Negative equity can be frustrating when you need a brand-new vehicle or when looking to trade in your current car.
If you become upside down on your car loan or can no longer afford your monthly payments, there are options to explore. One viable solution for customers with a negative auto loan is to consider lease options.
Benefits of Leasing a Car
Leasing a car is one of the most affordable and flexible ways of driving a new car. With the leasing option, you return the car to the dealer at the end of the leasing contract. The payment you make covers the depreciation of the value of the car. This is (basically) the same as renting. Though you don’t own the car, you can buy it at the end of the lease.
A lease option might be an attractive solution because it offers several advantages, including:
Lower Monthly Payments
Lease payments are usually lower than loan payments since you will pay for the vehicle’s depreciation.
An Excellent Way to Avoid Additional Debt
You can avoid adding to your existing negative equity by leasing a new vehicle. Since lease terms are primarily short, there is a possibility the vehicle’s value will not depreciate significantly.
Short-term Commitment
Leasing mostly lasts two to four years, giving a relatively short commitment compared to taking longer-term auto loans.
Considerations When Exploring Leasing Options
When opting to lease a car and you have negative equity, it’s essential to approach it carefully and understand potential implications. Some of the considerations include:
Looking for lease incentives: Look for dealerships that offer lease incentives like cash rebates or discounted lease rates.
Assess the negative equity amount: Knowing the exact amount of negative equity in your current vehicle will help determine the additional cost included in your new car loan or lease.
Go for a car with high residual value: Leasing a car with a higher residual value may help minimize the impact of negative equity on your monthly lease payments. Residual value is the estimated worth of a vehicle at the end of the lease term.
Opting for a lease buyout: If your financial situation improves over the lease period, consider buying out the leased vehicle. This presents an opportunity to build equity in the car for future ownership.
How to Get Out of a Negative Equity Auto Loan
Buying a car you can’t afford, avoiding a down payment, having a higher interest rate, or a long term are some causes of negative equity. If you find yourself stuck between a rock and a hard place due to negative equity on your car loan, there are other ways of getting out of this undesirable financial situation which include:
- Reach out to your leader and negotiate a new repayment plan, especially if you have a good credit score.
- Selling the vehicle with the lien since you don’t outrightly own the car.
- Refinancing your loan if you qualify for a lower interest loan.
- Paying off the loan by making one large lump sum.
- Ending a lease early or transferring your lease to another borrower
- Turning your car over to your lender or voluntary repossession
Whether you want to lease a car in Canada, trade in a car or want a new vehicle but still have negative equity, FFUN will get you sorted. Besides having a variety of automotive brands to choose from, we guide our customers through the car financing process and advise them on the best way to repair bad credit.
