Do you have an upside-down car loan? Here’s how to handle negative equity

What it means to have an upside-down car loan in Singapore

Being upside-down on your car loan means that the outstanding loan amount is higher than your car’s current market value. This situation, also known as negative equity, can make it difficult to sell or upgrade your vehicle without incurring additional financial losses.

For example, if your car is valued at S$80,000 but your remaining loan balance is S$85,000, you’re in negative equity by S$5,000. If you decide to sell or trade in your vehicle, you’ll not only have to settle the sale but also pay your lender the difference.

On the other hand, having positive equity — where you owe less than your car’s market value — gives you greater financial flexibility. If your car is worth S$80,000 and your outstanding loan is S$75,000, you effectively have S$5,000 in equity, which could serve as a down payment for your next car.

It’s important to note that a car’s valuation is not fixed and may vary depending on factors like depreciation, condition, and whether you’re selling to a dealer or a private buyer.

Why is negative equity on your car risky? 

Having negative equity in your car loan isn’t an immediate issue if you can comfortably make your monthly repayments and plan to keep the vehicle until the loan is fully repaid. However, financial situations can change unexpectedly, and being upside-down on your car loan can put you at a disadvantage in several scenarios:

• Your car is declared a total loss. If your vehicle is involved in a serious accident and deemed a total loss, your insurance provider will compensate you based on the car’s current market value. However, if your outstanding loan balance exceeds this payout, you’ll need to cover the difference out of pocket — potentially costing you thousands of dollars.

• You’re struggling with repayments. If your financial circumstances change and you can no longer afford your monthly car loan instalments, selling or trading in the car might seem like an option. But with negative equity, you’d still be responsible for paying off the remaining balance beyond the car’s sale price, which can be a financial strain.

• Your vehicle no longer meets your needs. Life circumstances can change, and so can your transportation needs. You might have purchased a compact car but now require a larger vehicle for a growing family. If you’re upside-down on your loan, switching to a different car means carrying over the negative equity or settling the outstanding balance before upgrading.

Find out where you stand with your car loan

The first step to addressing negative equity is understanding your current loan situation. Here’s how you can determine where you stand. 

1. Check your outstanding loan balance. Reach out to your lender or review your latest loan statement to see how much you still owe on your car loan. This figure is essential for calculating your equity position.

2. Estimate your car’s current market value. Find out how much your car is worth by checking online valuation tools such as SgCarMart, OneShift, or direct car dealerships. Keep in mind that trade-in values tend to be lower than private sale prices, so consider both estimates to get a better understanding of your car’s worth.

3. Calculate your equity. Subtract your loan balance from your car’s market value. If the result is positive, you have equity in your car, which can be beneficial if you plan to sell or trade it in. If the result is negative, you have negative equity, meaning you owe more than your car is worth.

Getting out of negative equity

Once you’ve determined where you stand, it’s time to take action. While these steps require effort and financial discipline, they can help you regain control of your car loan and avoid further financial strain.

• Make extra payments. Paying more than the minimum each month helps reduce the principal balance of your loan faster, which in turn lowers the negative equity. Even small additional payments can make a difference in reducing interest costs and shortening your loan term. Check with your lender to ensure that any extra payments go directly toward the principal rather than interest.

• Refinance with a shorter loan term. While refinancing won’t reduce your outstanding loan balance, switching to a shorter loan term may help you pay off negative equity sooner and save on interest. However, shorter loan terms come with higher monthly payments, so ensure that you calculate the loan and check if your budget can accommodate the increase before refinancing.

• Stay the course and drive through the loan. If refinancing isn’t an option, continuing with your current repayment schedule may still work in your favour. Over time, as you make on-time payments and your car retains value, you will eventually reach a break-even point and start building positive equity. If you owe significantly more than your car is worth, consider purchasing gap insurance for your car, which covers the difference between your loan balance and the car’s market value in the event of an accident.

• Consider trading your car for a lease. Some dealerships may allow you to roll your negative equity into a car lease. This means your lease payments will account for the outstanding balance from your old loan, allowing you to return the car at the end of the lease without owing additional money. However, this strategy only works if the lease terms are manageable within your budget.

Beware of dealer trade-in traps

When dealing with negative equity, trading in your car at a dealership might seem like the easiest way out — but it often leads to even deeper financial trouble.

Car dealers frequently offer to “help” by rolling your negative equity into a new loan. While this may lower your monthly payments in the short term, it also increases your total debt, extends your repayment period, and results in paying more interest over time. In many cases, you’ll end up owing more on the new loan than the car is worth, putting you right back in the same situation.