You may be able to trade in a car with negative equity, but it's not always an option. It depends on your specific situation and what the lender you're working with can offer. Even if a lender does allow you to trade in a vehicle that's upside down, we recommend that you avoid doing so unless the amount is insignificant.
3 Options for Trading in a Car with Negative Equity
Having negative equity means you owe more on your car than it's worth, and it's sometimes referred to as being upside down or underwater. Many people are upside down on their vehicle at some point during its loan term, and it's not a big concern unless you need to get rid of it.
If you want to trade in your car with negative equity and use it as a down payment, you typically have three options:
- Roll it over – Some lenders allow you to roll over the difference between what you owe and what your vehicle is worth into a new auto loan. This can be dangerous because the negative equity inflates the new loan's balance, which means your monthly payment increases and you're paying interest on it – you essentially end up for paying for two loans at once. This also puts you at risk of being upside down on the new loan right away and for longer, which can trap you in a never-ending cycle of negative equity.
- Pay the difference – The most ideal course of action is to pay the difference in cash. To find out how much negative equity you have, you need to get a loan payoff amount from your current lender, and you need to get your car appraised. Simply subtract what you owe from what your vehicle is worth, and that's how much negative equity you have. This is the amount you need to come up with in cash to cover it.
- Wait it out – If you don’t have the money to pay the difference, you can wait to take action until you have equity. If you don't need a new car right away, this is the best course of action so you can avoid rolling over the negative equity.
Getting Rid of Negative Equity
Ideally, you should cover any negative equity before you trade it in. If you can't and decide you have to wait, these two tips can help you get rid of negative equity more quickly:
- Pay more when you can – You could always pay a little extra on your auto loan each month, or simple pay more when you can. For example, if you get your tax refund or an inheritance, you can pay a lump sum to eliminate or reduce negative equity. Any more you can pay over your minimum monthly payment helps you get rid of negative equity more quickly.
- Sell the vehicle privately – If you’re keen on getting rid of the car as soon as possible, you could sell it instead of trading it in. Selling your vehicle privately gives you a chance to set its price above what a dealer is willing to give you. This may allow you to eliminate any negative equity, or more easily pay the difference in cash.
The Bottom Line
Before you head to the dealership, you should make sure you can cover any negative equity you have in your current car. If you can’t right now, the best course of action is usually to wait until you have equity even if you have the option to roll it over.
If you need an auto loan but worry your credit is going to stop you from getting approved, Auto Credit Express is here to help – whether or not you've paid off your current vehicle or not.
We connect people to local special finance dealers that have the lending resources to work with people in unique credit situations. To get matched to a dealership near you, start the process by filling out our car loan request form. Our service is fast, easy, and free, so you can get started with confidence today!