A car trade-in with negative equity: 3 options

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In a Nutshell

If you have a car loan and owe more on your vehicle than what it’s currently worth, you have what’s called negative equity. In that situation, trading in your car can be financially dicey. It’s important to carefully consider your options — such as continuing to pay off your loan to get positive equity in your car or rolling over your negative equity into a new loan — when deciding how to handle your trade-in. Some routes could cost you more than others.

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When you consider that a new car can lose 20% or more of its value within the first year, it’s easy to see how you could wind up owing more on your auto loan than your car is worth.

If the amount you owe exceeds the value of your vehicle, you have what’s known as negative equity. This is also referred to as being upside down on your car loan.

When trading in a car that has negative equity, you have several options — but they can be costly, and some require a big chunk of money out of your pocket.

Let’s take a look at how you can figure out how much negative equity you might have, along with your potential trade-in options.


How to calculate negative equity

If you’re pretty sure you’re upside down on your car loan and you’re thinking about trading in your vehicle, it’s important to figure out an estimate of how much negative equity you have. You’ll need to know some key pieces of information:

  • Your car’s estimated value
  • The amount you owe on your car loan

Third-party automotive websites, such as Kelley Blue Book and Edmunds, offer tools to help estimate your car’s trade-in value. You’ll just need to input details including the year, make and model of your car, and the number of miles on its odometer.

Contacting your lender is an easy way to find out how much money you owe on your car loan. You can usually find out by phone or by logging into your account on your lender’s website to view the payoff amount. Your loan payoff amount can be different from your current loan balance because it includes any interest you owe through the day you pay off the loan, in addition to any unpaid fees.

If the amount owed on your car loan is higher than your vehicle’s estimated value, the difference between the two is negative equity. For example, if you owe $9,000 on your car loan and your vehicle has an estimated value of $6,000, you currently have $3,000 of negative equity.

How to get out of your car loan when you’re upside down

Car trade-in option  No. 1: Delay the trade-in

When trading in a car that has negative equity, you have two main options: Delay your trade-in until you’re not upside down on your loan or move forward with the trade-in and pay off the negative equity.

Delaying your trade-in is generally the better option financially. But this works only if you can wait on getting a new car. You could either hold off your trade-in until you’ve saved up enough to pay off your loan, or — in the shorter term — you could pay extra on the loan until you’re no longer upside down.

Making additional, principal-only loan payments or paying more than your monthly minimum could help you pay down your loan faster and reduce your negative equity. But before you do this, make sure the terms of your loan don’t include a prepayment penalty. This is a fee some lenders charge borrowers who pay their loans off earlier than expected.

Car trade-in option No. 2: Pay off the negative equity

If you need a new car sooner rather than later, you’ll have to pay off the negative equity one way or another. There are a couple of ways to do this.

Pay the difference between the trade-in value and your loan balance

To get rid of your auto loan’s negative equity, you could pay it off all at once, out of your own pocket. For example, if you owe $12,000 on your vehicle and the dealer offers $10,000 for the trade-in, you would make up the $2,000 difference to your lender. Again, be sure there is not a prepayment penalty included in the terms of your loan.

Roll the negative equity into your new car loan

If you don’t have enough cash in the bank to pay off your negative equity, a car dealer will sometimes allow you to roll your negative equity into your new car loan. Let’s say you owe $15,000 on your car loan, but your dealer is offering only $13,000 for your trade-in. The $2,000 difference would be rolled into your new car loan. This can be convenient, because it doesn’t require you to pay off your negative equity out of pocket.

But going this route usually means borrowing more on your next loan than your new car is worth — putting you at greater risk of becoming upside down on that loan. A bigger loan amount also means you could pay more in interest. Be sure to confirm that you are not required to make payments on both loans, and that you are clear on all the terms of the new loan.

Another heads-up: According to the Federal Trade Commission, some dealers may promise to pay off your existing car loan as part of a trade-in, but will actually just roll your balance into your new car loan or deduct it from your down payment. Doing either can increase your loan costs. Be sure to review your sales contract carefully before signing.

If a rollover is your only option, consider getting a used car that’s a year or two old rather than the new version. A used car will have a lower value, due to depreciation, which means you likely won’t need to borrow as much.

Trade-in alternative: Sell your car privately

Keep in mind that trading in your car at the dealership isn’t your only option. You could also be able to sell your car to a private buyer. Check first with your lender to ensure this is an option based on the terms of your loan and what, if any, additional steps would need to be taken to make the sale.

This option comes with one big advantage: You’ll likely get more money if you sell privately versus trading in your car at the dealership. Dealers generally offer no more than wholesale value on a trade-in. With a private-party buyer, you can usually sell the car at a higher price, which could help offset your negative equity.

The drawback to selling to a private party is that it can require more legwork and time than a dealership trade-in. Often this involves gathering documents such as your title and maintenance records, posting ads for the car, vetting potential buyers and giving test drives.

Should I sell or trade in my car?

Bottom line

If you’re upside down on your car loan, it’s a good idea to delay your trade-in if you can — unless you are comfortable paying off your negative equity upfront.

But if you need a new car soon and a negative equity rollover is your only option, consider buying a used car and borrowing as little as possible.

And make sure to double-check that the loan term and monthly payment amount can fit within your budget. As the loan term lengthens, the risk of negative equity becomes greater because the car will continue to depreciate. You could also end up paying more in interest over the length of the loan.