When it’s time for another vehicle, owing money on your current loan shouldn’t necessarily stand in your way. Here at Auto Credit Express, we often get consumers asking for advice in this situation. Take this recent comment:
“I’m looking to buy a 2012-2013 Chevy Silverado, but my pay off on my 2005 Ford F150 is $5,992.30 and my trade in value is between $4,000 and $4,500. I can bring $2,000 out-of-pocket, what are my options?”
In this example, the customer’s current vehicle is worth less than what he owes on his loan, meaning he has negative equity. However, because of his out-of-pocket cash, this consumer may even come out ahead. Assuming he gets the maximum trade-in value from his truck, he should have about $507 left to put down on his next vehicle.
Paying off Your Current Loan
The biggest thing to remember is that no matter how it’s done, the current loan must be paid off. With a trade-in that is upside down, you're usually faced with two choices: paying the lien holder out-of-pocket or “rolling over” the difference into your new loan.
Let’s look at these options using our consumer’s situation. If he gets the $4,500 from his trade-in, he will still owe $1,492.30, which, according to his comment, he can cover out-of-pocket. But what if he didn’t have cash to bring to the table?
In this case, he could “roll over” the amount he owes on his current loan to his new loan. This is one way people with negative equity can still get an auto loan, but it may not always be the best idea. Adding to the new loan balance will leave you paying more in interest charges over the term of the loan.
Maintaining Your Equity
The best way to come out on top with a trade-in is to maintain as much equity in your vehicle as possible. Depreciation— your vehicle’s loss of value over time — happens no matter what and begins as soon as you drive off the lot.
One way to maintain equity is to pay a large down payment of at least 20 percent at the time of purchase. Another option is to keep your loan term as short as possible. A shorter loan term saves you money in interest charges and, as your balance drops, your equity in a vehicle goes up.
Increase Your Trade-in Value
Maintaining your vehicle’s equity could lead to more value at trade-in time. These tips will help:
- Keep up with appearances – How your vehicle looks, both inside and out, can add to its value. So, make sure to keep it clean.
- Perform regular service – You’ll have a better chance to maintain your vehicle’s resale value if you follow the manufacturer’s recommended service guidelines. Don’t forget to keep all records.
- Keep your mileage low – The more you drive, the faster your vehicle depreciates. A vehicle’s mileage compared to its age has a big impact on value.
The Right Deal for You
When it’s time to trade in your vehicle, don’t let negative equity stand in your way. There are ways to trade in your car if you still owe money on a current loan. If you're stuck in this situation and don’t know where to turn, Auto Credit Express wants to help.
We work with one of the nation’s largest networks of special finance dealers, and they have the subprime lenders available to help people in most types of credit situations. It’s easy to get started. Just fill out our no-obligation auto loan request form online today.