Car Loans for Bad Credit and Negative Equity
Getting a car loan with bad credit and negative equity can be difficult, but it’s possible with this guide from Jerry.
Written by Maxine Boyko
Reviewed by Jessica Barrett
If you have bad credit and negative equity on your car, you may be able to secure a
car loan
through refinancing or by continuing to make payments. Keeping your cool under such stressful circumstances can be difficult, but avoiding costly mistakes under pressure comes down to having the right tools. While your unique situation will ultimately impact the number of options you’ll have when it comes to securing your auto loan, there are a few immediate steps to consider.
Fortunately, the
car insurance
comparison app Jerry
is here to break down what to do about car loans if your finances are in a bind. In this article, we’ll go over the ins and outs of bad credit, how negative equity car loans work, potential limitations, and how to move forward. We'll also show you how to lower your insurance costs using our
trusted quote comparison tool
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How car loans work
A car loan allows you to purchase a car by making regular monthly payments to a lender rather than paying the full cost of the vehicle up-front. In addition to the loan principal (the amount you borrow), you will also agree upon a loan term, interest rate, and APR.
Over monthly installments, you’ll pay back what you owe, plus the agreed-upon interest rate. As long as you pay off the loan principal and the interest within your loan term, you’ll be the legal owner of your car! If you don’t keep up with your scheduled payments, however, your lender is legally allowed to
repossess the vehicle
. Since your credit score, debt, and debt-to-income ratio play a key role in determining your loan eligibility, it can be extremely difficult to secure one when your credit is bad and the car you’re driving has negative equity.
With a little persistence and know-how, you can make it happen!
Understanding negative equity and a bad credit loan
Applying for a car loan with negative equity and bad credit will put you in a pretty unfavorable position compared to other applicants.
According to
Experian
, you have bad credit if your score is between 300 and 579. Since lower credit scores pose a high risk to insurance companies, it can make it tough to secure a car loan, and even tougher to get a good deal. Negative equity
means that the amount you owe on the car’s loan is greater than the value of the car itself. While negative equity doesn’t pose a problem, it can hold you back if you need to get a car loan. Instead of bringing a down payment to the table, you’re bringing debt. Over 15% of Americans have a poor
credit score
and roughly 30% of new car owners in 2021 owed at least $3,700 on their previous loans. While you may feel like you’re the only one with bad credit and negative equity on your hands, it’s more commonplace than you might think. Getting a car loan with negative equity and bad credit
The first thing to consider when you’re trying to secure a car loan is that you will have to get rid of your negative equity and find ways to build credit over time.
Negative equity and bad credit do not go away overnight. Here’s how you can start working toward getting a car loan with negative equity and bad credit.
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Keep making payments
Your safest option when you are in debt with bad credit is to keep making payments until you own the car or the loan amount is lower than the car’s value. To calculate your negative equity, subtract the estimated value of your car from the amount you owe.
Once you know how far you have to go on your loan, you can start making steps toward a neutral place. Keep in mind that this will take time.
Try to make larger payments and extra payments whenever possible. That way, you’ll pay off your interest more quickly, which will allow you to start paying off the vehicle’s principal value.
While it’s not the quickest option, it will buy you extra time to improve your credit. Remember, the higher your credit score, the better chance you will have at securing your car loan.
Key Takeaway The worst payment is no payment, so continue contributing funds to your loan whenever you can to rebalance your finances in the long run.
Refinance your loan
If you need to get a car loan quickly and eliminating your negative equity will take too long, you may consider refinancing your loan. While there are no guarantees, it is worth a try.
Typically, you need good credit to qualify for a refinanced loan with a lower interest rate. To be able to pay the car off as quickly as possible, you’ll want a shorter loan term.
The solution? A co-signer!
Having a co-signer with an excellent credit score (700+) and solid financial background will help you renegotiate better loan terms and allow you to catch up on your payments.
Reducing your debt as much as possible in the days leading up to refinancing will put you in a better position. That could mean supplementing your income with a part-time gig or making additional payments to prove that you’re on your way to better credit.
Trade-in your car
Trading your car into the dealership is one option, but it can be a tricky route to take. Whether you have little negative equity and it’s your only option, or you simply want to get rid of the vehicle no matter what the consequences are, you technically can roll the negative equity of your current car into a new car loan.
Keep in mind that you probably won’t get a lower monthly payment out of it, and there’s a likely chance that you will end up having to pay much more down the line than if you were to stick to paying off your current vehicle.
If you decide to trade your vehicle in, take advantage of as many new car rebates, discounts, and other incentives as you can. Any avenues you can take to increase your savings will go a long way.
Make sure you’re fully aware of your financial situation so you can make informed decisions at the dealership. Without careful budgeting, you could sink yourself further into debt.
Sell your car privately
If the other options aren’t cutting it and just have to get rid of your vehicle, you could try a private sale. One positive aspect of selling your car privately is that you will generally earn more money for your vehicle than if you were to trade it in at the dealership.
Even if you’re able to finagle a better deal, you’ll still be on the hook for your negative equity—and you’ll still have a bad credit score. While it may seem like a quick way to make a few extra bucks, you’ll be in the same financial situation—and without a car.
Unless you have another vehicle to use, you’ll be much better off continuing to make payments on your current vehicle or trading in your vehicle at a dealership.
MORE: Trade-in vs private sale: What’s the best way to sell your car?
Save money on car insurance
Regardless of the state of your finances, it’s possible to find savings on your car insurance with the licensed broker app
Jerry
. Shopping for car insurance is a breeze with Jerry. After you download the app, all you need to do is answer a few quick questions. You’ll then have access to the most competitive quotes from more than 50 top insurance companies in the country.
It takes only 45 seconds to sign up, and it’s free! The best part? Joining Jerry could save you an average of $887 per year on your car insurance!
“I was tired of looking around multiple websites, so I decided to giveJerrya try. Let me tell you—the process is so easy and simple, and they really find you the best prices for your coverage level. Getting insurance for my new car was quick and easy!” —Joanna D.
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