According to a recent report, almost one-third of cars consumers traded in on new car purchases had negative equity in 2017.

Trade-ins with Negative Equity

shocked man with calculatorThe car-shopping website keeps a close eye on the automotive industry. According to their report, the number of trade-ins that are upside down is on the rise. In 2017, almost 33 percent of trade-ins on new car deals were underwater, meaning the vehicle is worth less than what's owed on it. A decade earlier, Edmunds' data shows that this number was closer to 25 percent.

The amount of negative equity being brought to a deal is also on the rise. In 2017, the average amount owed on a trade-in on a new car purchase was $5,130. This is up from $4,832 in 2016, while the average amount ten years ago was only $4,075.

Reasons for Upside Down Trade-ins

There's a combination of issues boosting the uptick in both the percentage of trade-ins with negative equity and the amount owed. Here are two big factors:

  • Higher Transaction Prices – Cars have gotten more expensive in recent years. According to Experian, the average car loan amount in the third quarter of 2017 was $30,329 for new vehicles and $19,291 for used vehicles.
  • Longer Loan Terms – Consumers are taking out longer loans to lower their monthly payments. Experian's data for the third quarter of 2017 shows the average loan term was 69.0 months for new cars and 63.95 months for used cars, while loan terms of between 73 and 84 months weren't all that uncommon.

With more expensive vehicles, consumers are looking at higher starting loan balances. Car buyers who extend the length of their loans to make their payments more affordable are also paying down their loan balances at a slower rate, which is why this combination leads to more negative equity situations.

Negative equity is especially common in the first few years of a loan, when interest charges are the highest and depreciation is the steepest.

The Trouble with Trading in a Car with Negative Equity

The issue with trading in a car while you're upside down, if a lender allows you to, is that the balance isn't going away. The difference between what your trade-in's worth and how much you owe on your loan has to be dealt with one way or the other.

If you're trying to trade in a car that you're upside down on, you may need to pay the difference out of pocket. Another solution could be to target a new vehicle with a big manufacturer cash back rebate attached to cover all or most of the negative equity. If both of those options are off the table, you may have to wait it out with your old car until your equity situation has improved.

A different – and more financially dangerous – answer is going ahead and trading the vehicle in anyway and rolling the negative equity into your next loan. The lender may not allow this, especially if you're dealing with credit troubles, but it's not an uncommon scenario.

However, we recommend that you avoid this at all costs. Rolling the balance into a new loan only compounds the problem you're already facing. It increases the amount you need to finance, meaning it makes your monthly payments higher and interest charges greater. If you need a longer loan to afford the payments after doing this, the problem gets worse.

Basically, rolling over negative equity guarantees you'll be upside in your next purchase. When it comes time for another vehicle a few years later, you'll likely face the same problems.

The Bottom Line

If you have equity in your trade-in, you can apply all or part of its value to your next car loan. If you're facing negative equity, which this report shows is becoming more common, things can get more complicated.

Regardless of whether or not you have a trade-in, Auto Credit Express wants to help you find auto financing. We match people to local dealerships that are equipped to handle unique credit situations. Our service is free of cost and obligation, and all you have to do to get started is submit our secure car loan request form.