Trading in a Car with Negative Equity

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When financing a car, there are many things you’ll need to consider. If you have an existing car that you’re planning on selling to help pay for your new car, you may be considering using it as a trade in. When it comes to trade ins, it’s important to consider your equity in the vehicle and how to handle it if you have negative equity.

“Trade In” Defined: When you sell your current car to the dealership you’re purchasing a new one from to contribute to the payment of the new vehicle.

“Negative Equity” Defined: Having an outstanding balance that exceeds the current value of your vehicle.

Negative equity is often referred to as being “underwater” or having a car loan that is “upside down“.

Can I Trade In My Car if it Has Negative Equity?

If you find yourself in a situation where you need to upgrade to a new vehicle, but still owe more than your car is worth, you may be wondering if it’s possible to trade in your car with negative equity.

The answer is yes, but it may not always be the best option.

Depending on the type of dealership you are working with, there may be additional requirements to get approved for financing. This is because a negative equity trade in increases the risk of the loan in the eyes of a lender, so they may want additional down payment, a cosigner, or different terms to confidently approve the loan.

When you trade in a car with negative equity, the value of the trade in is applied to the new loan. Any remaining balance from your old loan is also applied to the new one, increasing the amount financed on your new vehicle.

This can end up costing you more in the long run and start you off with significant negative equity on your new loan.

How to Trade In an Upside Down Car: Your Options

If you do decide to trade in a car with negative equity, you’ll be rolling over that negative equity into your next car loan. Transferring the outstanding balance can all be handled by the dealership during the sale process.

Negative Equity Trade In Process

  1. Calculate your negative equity
  2. Explore vehicle options
  3. Securing the right financing options and term
  4. Get preapproved
  5. Review the contract

To calculate your negative equity, subtract the estimated value of your car from the amount that you still owe on it. You can get your estimate from several different tools such as Kelley Blue Book (KBB).

Alternative to Underwater Trade-Ins

Depending on your vehicle and financial situation, you may have better options than to go forward with a negative equity trade in. Here are some alternatives to consider.

Selling Your Negative Equity Vehicle

You can often get more for your vehicle by selling it privately. The tradeoff for this is that it can take significantly more time and effort than a trade in.

If you can sell your vehicle privately and use those funds as a down payment, you might be able to reduce the amount of negative equity you’re transferring over to the new loan.

Refinancing with Negative Equity

If it isn’t required to get a new vehicle, you might want to consider refinancing and resolving the equity in your current vehicle before choosing to finance a new one.

If you’ve improved your credit score, have access to funds to make a one-time payment towards the loan, or if rates have come down – you may be able to secure better rates and terms on a refinanced car loan. This would allow you to keep your current vehicle, resolve your negative equity situation, and then take on a new car loan in a better position.

Hold Off Trading In

If you’re not in a rush to get a new vehicle, it might be best not to force it and take on a rollover of negative equity. Individual circumstances may not make this a practical option. But if possible, you’d be better off financially to pay off any negative equity before trading in your vehicle.

Offset Your Negative Equity with a Down Payment

If you have funds that you can use as a down payment during the financing process, you could essentially pay off the negative equity so that you’re going into your new car loan as if it were brand new.

By using a trade in and a substantial down payment, you can seamlessly transfer from one car loan to another without the burden of financing additional negative equity from your past vehicle.

Should I Trade in a Car if it has Negative Equity?

Ultimately, the decision of whether to take on a new car loan when your current vehicle has negative equity will depend on your individual situation.

In most cases, resolving your negative equity before diving into a new loan is likely the best option.

However, for some individuals it may make more sense to roll over the remaining balance to a new car loan for the purpose of getting into your new car quickly.

Be sure to explore your options and calculate your equity before jumping into a new loan.