If you have a car to trade in and you owe more on it than it's worth, you have negative equity. This is something most vehicle owners experience at some point during their loan term. There's a lot to consider if you're trying to trade in a car with negative equity. Let's look at the steps you need to take and the options you have available to you.
3 Ways to Trade In Your Car with Negative Equity
It’s normal to have negative equity at some point. It happens because vehicles depreciate in value, often at a greater rate than buyers are able to pay down their loan.
Being upside down or underwater, which are other terms for having negative equity, isn't always an issue. It only becomes something to deal with if you're trying to trade in or sell the car, or it gets totaled or stolen, before the loan is paid off.
How do you trade in a vehicle with negative equity? Your options may vary by lender, but you generally have three to choose from:
- Pay the difference – If you have the cash to pay the difference between your loan amount and the value of your trade-in, you can do so up front. You need to have your car appraised first, though, so you know its actual cash value (ACV), and you also need a 10-day payoff amount from your current lender. To find out how much you owe, subtract the ACV from the loan payoff.
- Roll the balance over – If the lender allows this, you can roll the negative equity into the new auto loan. However, this is something that we recommend that you avoid at all costs unless the amount is small. This means your negative equity is added to your new loan, which leads to a higher loan amount, a higher monthly payment, and increased interest charges.
- Wait it out – If you can, you could try waiting until you have equity in your current vehicle, or the difference is small enough that you can pay it in cash.
Getting Rid of Negative Equity
Ideally, your car should have equity before you head to a dealership to trade it in. This isn’t always the case, though, and you may need to find alternative ways to get around being upside down.
How do you eliminate negative equity on your own? Here are two options:
- Pay more each month – Although this could take some time, you can build equity more quickly if you can increase the amount you pay each month.
- Sell the vehicle privately – If you’re set on getting rid of your car, you could try selling it privately for more than what a dealer is willing to offer you. If what you can sell it for is high enough, you could eliminate the negative equity. Otherwise, you still must cover the difference before you can transfer the title.
Looking for a Dealership to Work With?
Negative equity is often part of the vehicle ownership experience. Luckily, you won’t be upside down forever, and there are a number of ways to build equity sooner.
If you’re considering trading in your car, you should plan ahead, have it appraised, request a payoff quote, and calculate how much negative equity you have so you can pick the right route for your situation.
If you’re ready to trade in but worry your credit is standing in the way of getting your next vehicle, let Drivers Lane help. We'll work to match you with a special finance dealership in your area if you fill out our free and fast auto loan request form. Get started today!