You may find yourself in a situation where you need to purchase a car, but you still owe money on the loan that you used to purchase your current/previous vehicle.

Sure, you could trade your current car in, but what if, because of depreciation, you actually owe more than what the vehicle is worth? Or, what if you have totaled your car (with no GAP insurance), and your loan balance is more than the amount of your insurance check?

When You Just Want a Different Car

Maybe the vehicle you've purchased is too big or too small. Maybe the payments are more than you can afford, or perhaps you simply don't like the car. Whatever the case may be, if you want to trade in a vehicle with negative equity, you will have to deal with the difference between the car's current value and what you still owe on the loan.

Buying a Car with Negative Equity

  • You can pay the difference outright. This option is, of course, dependent upon how much extra cash you have on hand. And if you are able to just pay off the loan, will you still have money left over for a down payment on the new car? It's always wise to put money down on a vehicle purchase, especially if you have less than perfect credit.
  • You may be able to roll the difference into a new loan. Some dealers will allow you to tack some or all of the negative equity amount onto the total that you intend to borrow for your new car purchase. Just be careful with this. When you sign a new loan contract, you'll be agreeing to pay interest on both the price of the new vehicle and the outstanding balance from your old loan. Because of this, your payments could be expensive.
  • You may just want to hang on to the car you have. This is probably not want you want to hear, but it may be the best advice. Rolling old debt into new debt is usually not the best option. So, if you're driving a vehicle that you don't like, try to hang in there at least long enough to build up some positive equity in your loan. If, on the other hand, you really and truly can't afford the car payments, there are other options to explore.

As with almost everything else in life, the best way to tackle the negative equity problem is to take preemptive measures. If you're in the market for a vehicle, do extensive research and take a thorough test drive in order to be certain that you will be happy with the car you're considering. And, if possible, put down an appropriate down payment to guard against negative equity accumulation.

In the Event of an Auto Accident

If your car is declared a "total loss" after a collision, your insurance provider should cover the cost of the vehicle's current value. However, if the balance of your loan exceeds what the car is worth, you are responsible for the difference.

After you've recovered from your accident, you'll probably need to buy another vehicle. And if you find that you do owe money on your loan, your options are similar to those described above. The main difference being, of course, you cannot choose to drive a car that has been totaled. You'll have to get a new car one way or the other. You'll either have to pay off the loan out of pocket or roll all or part of the remaining amount into a new car loan.

GAP Insurance

In this case, the old saying, "An ounce of prevention is worth a pound of cure," is absolutely true. If you purchase a brand new car, you need to have Guaranteed Auto Protection (GAP) coverage. This is a relatively inexpensive insurance that will cover the difference between what the vehicle is worth and what you owe on your loan in the event of an accident that leaves the car totaled.

When You Need to Buy a Car

Whether you're purchasing your first vehicle or replacing a lost car, Auto Credit Express can help you with financing. Even if you have imperfect credit, we can connect you with a dealer in your area who is qualified to handle your situation.

Just fill out our fast and secure online application to get started today.

By the way, if you have recently been in an auto accident or experienced another kind of catastrophe that has led to harassing calls from debt collectors, click here to find out how to make these stop. Exercise your right to end harassment now.