If you owe more money on an auto loan than what the vehicle is worth, then you have negative equity or are "upside down." Having negative equity is quite common, and it isn't always a problem. That is, until you need to trade in the vehicle.
What Happens When You Need a New Car But Have Negative Equity?
Due to depreciation, many people who finance their vehicle are going to be upside down at some point. It is extremely common with long-term loans where little to no down payment was made, or if a balance from a previous loan was rolled into the new loan.
The majority of people who keep their car and pay off the loan will not even realize they were ever upside down. However, this becomes a tricky situation if you need to get rid of the car.
There are plenty of circumstances that may call for this - if your family has gotten bigger, if your income situation has changed, or if you've had it with the car you are driving, etc. - but the resolution is always the same: You need to get out of the loan before you've paid it off.
There are a few different courses of action you can take:
- Tough it out: Postpone your vehicle purchase until you have eliminated the negative equity, or until you have paid off the loan.
- Cover the balance yourself: To find how much negative equity you have, get the payoff value of the loan from your lender, then research the value of your vehicle and subtract these two numbers. The difference would be what you would need to personally cover if you wanted to eliminate the negative equity.
- Trade it in and roll the balance into a new loan: This is the most common course of action if you already know that you need another car.
Trading in a Car With Negative Equity
So, your vehicle needs have changed and you need a different one, but you have negative equity on the vehicle that you want to trade in. Lucky for you, many lenders are willing to roll over what you owe on the trade-in into the new car loan.
The dealer will want to know the payoff value of your current loan, so you'll need to find that out from your current lender. You should also research the value of your trade in (use valuation guides like Kelley Blue Book or NADA Used Car Guide), and bring in some price quotes with you to the dealership.
But if you plan on doing this, you need to be aware of some things:
- The balance isn't going away - You may have seen or heard ads where dealers promise to trade you out of your vehicle "no matter what you owe." This can be misleading because they aren't getting rid of the negative equity, they will simply include it in your new loan. Always read the contract carefully and ask how the negative equity is being treated.
- You are financing the negative equity - When you carry over the negative equity, you are financing the selling price of the new car plus the money you owe on your current car. This means it is being factored into your monthly payments and you are paying interest on it. It also increases the chance that you will find yourself even further upside down on the new loan.
- It may limit your options - Doing this could result in reduced vehicle choices at the dealership, or it could limit which loan programs you are able to qualify for.
Sometimes, life throws you a curveball and you need another vehicle sooner than you expected. If the negative equity you carry over is minimal, then it's not going to be such a burden to bear. However, a snowball effect can be created if you continually do this with every car purchase you make. It's not smart to carry over negative equity from car to car, as your debt will only grow larger and larger.
And if you have bad credit, having a trade with negative equity could hurt your chances of getting approved, as well. Luckily, we have the solution.
We Can Help
If you have bad credit, it can be extremely tricky to find a loan approval, especially when you are dealing with negative equity. But Auto Credit Express has built up the nation's largest network of special finance car dealers in the country.
We have the dealers that know how to handle the trickiest of credit situations. So, if you have a trade with negative equity, come to us and we will do what we can to help you secure the financing you desire.
To apply, just fill out our simple and secure online application. It only takes a couple of minutes, our service is completely free and it puts you under no obligation whatsoever.