Combining Negative Equity and a Low Credit Score

The difficulty of dealing with a low credit score, combined with negative equity in a car can create very real problems for people. Here is our advice.

Combining Negative Equity and a Low Credit Score

The Story so Far

Over the past 5 years new car prices have increased while the average Americans paycheck has remained the same, or decreased for some. As a result, the amount of money the average car buyer can put aside for a monthly car loan payment has remained flat. The Seasonally Adjusted Annual Rate (SAAR) projection for new car sales this year is up, most analysts predict around 15 million new cars will be sold in 2013.

One of the ways captive OEM finance companies, and well as local banks and credit unions, have addressed higher automobile costs, and lower consumer disposable income, is with extended loan terms. Many years ago the standard loan term for a new car was 48 to 60 months. At that time it was normal, and mostly expected, that new car buyers have a reasonable, if not substantial, cash down payment. Today, this is no longer the case. Many car shoppers are buying expensive new cars with loans that have little or no money down, while at the same time controlling the monthly payment with extended loan terms of 72 or 84 months.

Buying a new car with little to no money down and a loan term at or over 72 months is quite common and has created an epidemic of negative equity. Under the scenario above, most people will owe more money on their car loan than what the vehicle is worth, for almost the entire length of the loan. At Auto Credit Express, we recommend that consumers should never trade their car in, and buy a new car, if they have negative equity. Negative equity simply does not just go away. Like a virus, it gets bigger and migrates to your new auto loan.

The problem is exacerbated if your credit score has decreased due to the economic downslide we’ve been in over the last 5 years. If this is the case, the interest rate on your new car may be higher than it was on the vehicle with negative equity that you are trading in. For most of us, it just does not make sense to roll over negative equity to another loan, which may have a higher rate.

When You Should Trade-in A Car with Negative Equity

We realize there are circumstances that warrant trading in a car with negative equity such as:

  • Needing a car which seats more passengers
  • Needed auto repairs are cost prohibitive
  • Driving a vehicle with very poor MPG rating long distances to work
  • Needing a lower monthly car payment (it is rare that people with negative equity are able to lower their monthly car loan payment)

If any of those circumstances apply to you, or you just really want to trade in your car with negative equity and a low credit score, the following advice may help. First, you should know that lenders typically will not lend more money than the car is worth, especially to people with low credit scores. To better your chances of getting approved you should lower the amount of negative equity.

Ways to Lower the Amount of Negative Equity on Your Trade In

The easiest way of course it to apply a cash down payment that is larger than the amount of negative equity, for most people who are underwater in their trade, however, this is not possible. One of the best recommendations we have at Auto Credit Express is to find a used car that has a high Book Value and a low Market Value.

Book Value
There are three major valuation sources used to access the value of a used car, the NADA Valuation Guide, Kelley Blue Book (KBB), and Black Book. Prior to the Internet and technology explosion these source valuations were only available in printed format, thus the name Book Value was created. Even today, many used car manager have one of these books in their back pocket


Market Value
The agreed upon price between a buyer and seller


Vehicles which have a high book value and low market value are typically vehicles that are in low demand and high supply. That is not to say that these are undesirable vehicles, merely that there are a lot of them for sale in an area. A common cause of this is off lease vehicles. If the manufacturer placed a special 36 month lease incentive a new car model three years ago, because they were over stocked, then the used car market would be over stocked with these same vehicles today. Another approach is to find a new car that you want to own, which has a very large rebate. The cash rebate can be used toward the down payment, which of course would lower the negative equity.

As we see it

Many folks trade in their vehicles with negative equity just because they want to drive a new car. The desire for a new car however, may result in increasing your debt versus equity even more. If it possible, we strongly recommend keeping your vehicle until the negative equity has been erased. Another alternative, which we have not addressed here, is auto loan refinancing.

Auto Credit Express matches consumers with lower credit scores, many of whom believe their only option is the local buy here pay here car lot, with dealers that can offer them their best opportunities for nice cars and credit approvals.

So if you’re ready to establish your auto credit, you can begin now by filling out our online auto loan application.

Posted on October 9, 2013 by in Bad Credit
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