Realizing you owe more on your vehicle than it’s worth can be frustrating. Whether you’re trying to reduce monthly expenses, upgrade to something nicer, or simply move on from a car that no longer fits your life, negative equity complicates things.

But the good news is that you have options. With a bit of planning and the right strategy, you can get out of a car with negative equity without too much financial harm.

Calculating how far underwater you are

Check your lender’s payoff amount and compare it with your car’s current market value using sources like Kelley Blue Book or Edmunds. Then, subtract your car’s value from the balance owed. If the resulting amount is positive, that’s the negative equity you’ll need to address.

Option one: Keeping the car and paying it down

If your car is still reliable, the simplest and most cost-effective route is to keep driving it while making extra payments. Even putting an additional $50 to $100 towards the principal each month can close the gap faster. Consider using tax refunds, bonuses, or side income to make lump-sum payments as well.

Option two: Refinancing your auto financing

If your credit profile and income have improved, refinancing may help. A shorter finance term or lower interest rate can reduce the total interest paid and speed up your breakeven point. Just be cautious about extending the term to lower your monthly payment; that can keep you upside down even longer. A higher interest rate will hurt you as well.

Option three: Selling the car and paying the difference

Selling privately can often net you more than trading in at a dealership. Doing so means having less negative equity to cover. Once you do sell, you’ll then pay your lender the difference out of pocket. Of course, you can always trade in your vehicle at a dealership and pay the shortfall in cash, so you won’t have to finance it.

Option four: Rolling the negative equity into new financing

While not ideal, some dealers may allow you to roll your negative equity into your new financing. This move should only be made if you’re switching to a less expensive or slower-depreciating vehicle to limit future risk.

3 ways to protect yourself from future negative equity

Once you’ve dealt with your current financing, it’s important to avoid repeating the same mistake. Here are a few proactive steps to protect yourself from falling back into negative equity:

1. Negotiate the price of the new car separately

A solid strategy is to agree on the final sale price of your next vehicle before introducing your trade-in. This negotiation tactic keeps the two transactions clean and reduces the chances that the dealer will bury your negative equity in the new financing.

2. Don’t be afraid to walk away

If a dealer insists that rolling over your negative equity is “standard practice,” take that as a red flag. Wait a few more months, make extra principal payments, or choose a lower-cost vehicle.

3. Consider gap insurance

If you’re still underwater and are worried about unexpected events, signing up for gap insurance might not be a bad idea. It covers the difference between your car’s value and the balance you owe if the vehicle is totaled or stolen, protecting you from an out-of-pocket hit.

Looking to replace your current vehicle?

When you get pre-qualified through the Credit Acceptance, we’ll provide you with a shortlist of dealerships in your area from our network of over 15,000. If you want to avoid negative equity, let the dealership know, and they can explain your financing options and discuss factors that may affect your equity position.