Having negative equity in a car loan, or being “upside down” or “underwater,” is common. But if you’re looking for a new car and want to trade your old vehicle in, what options do you have and what should you do about it?

Options for Underwater Car Loans

When you owe more money on your loan than the car is worth, you have negative equity. If you have negative equity in your vehicle, you can sometimes still trade it in using one of these three options:

  1. Should I Trade in My Car with Negative Equity?Pay the difference – If you’re able to, you should pay off the negative equity. To do this, get the loan payoff from your lender and look up your vehicle’s current value through a valuation guide such as NADA. Subtract these two values, and that number is the approximate amount you’ll need.
  2. Roll the difference over – If the lender gives you the option to roll over the difference, you could do this as well. The issue with rolling over negative equity into a new loan is that it doesn’t go away, but increases the amount of your new loan and results in you paying interest on it. You’ll also be even more underwater on your new car, which could leave you this way for longer.
  3. Wait to trade it in – If neither of the two suggestions above are options, the last option is to wait until your negative equity has been eliminated before trading it in.

How to Get Out of an Upside Down Car Loan

If you want to get out of being upside down before trading in a car, you’ll need to eliminate any negative equity. If, after crunching the numbers, you know you won’t be able to pay it off all at once, there are three alternatives to think about:

  • Talk to your lender – One of the first things you should do is contact your lender and explain your situation. Discuss how you can get yourself out of being upside down – possibly by refinancing the vehicle and lowering the interest rate. If it’s a simple interest loan (most are), you can pay more each month without penalty which will also reduce negative equity faster.
  • Consider a personal loan – If the interest rate on a personal loan is lower than your car’s current loan, consider taking out a personal loan. In this case, you could use the personal loan to either pay off the car or eliminate the negative equity. Just make sure you can financially handle this.
  • Consider selling the car privately – If you’re unable to use your car as a trade-in, and you want to get rid of the negative equity, selling the vehicle privately is one of the best ways to do this. When you sell a car privately, you may be able to sell it for more than the dealer offered, making it easier to pay off. Make sure you can sell the vehicle at a price that’ll allow you to reasonably sell it while minimizing (or eliminating) the amount you need to cover out of pocket.

Bottom Line

Dealing with negative equity in a vehicle you no longer want can be difficult. Depending on how much negative equity there is and your options, it may not be the right time to trade it in.

If you're struggling with credit trouble and are looking for a dealer willing to work with you, Auto Credit Express wants to help regardless of whether or not you have a trade-in. We work with a nationwide network of car dealerships that are connected to subprime lenders that know how to handle unique credit situations. All you need to do is fill out our auto loan request form to get started today.