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How To Trade in a Car With Negative Equity

in Car Buying Tips
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Many of our readers are asking if it’s possible to trade in a car that’s not paid off. The answer is yes; you can trade in a vehicle even when it’s under financing. However, the car loan balance must still be paid, but in most cases, the vehicle’s trade-in value will take care of that. However, that depends on several factors like your car’s age and condition.

If your car is worth more than your outstanding loan amount, you have what is referred to as positive equity, and you’re in good shape. But what if your car’s worth is less than the money you owed?

Today, let’s talk about how to trade in a car with negative equity, learn how it works, and what you can do about it.

What is Negative Equity?

Before we learn about the options on how to trade in a car with negative equity, let’s first define negative equity.

Equity refers to the difference between the actual cash value of your vehicle and the amount you owe on your car loan. In the case that you owe more on your loan than the actual value of your car, you have negative equity. It’s also known as being “upside-down” or “underwater” on your car loan.

For example, if you still owe $10,000 on your car loan, but your car has an estimated trade-in value of $7,000, you’re looking at $3,000 of negative equity. The more negative equity you have, the more you have to pay out-of-pocket to settle your car loan and complete the trade-in.

Again, your car’s estimated value is based on several factors like age, condition, and vehicle history. Considering that a new car can lose 20% or more of its value within the first year, it’s not hard to wind up in a situation where you owe more than your car’s worth.

In reality, most people aren’t affected or familiar with negative equity until it’s time to sell or trade in their car.

How to Calculate Negative Equity?

If you think you’re “underwater” on your car loan and you’re looking to trade in your vehicle, it’s highly recommended that you calculate just how much negative equity you have. To calculate your negative equity, you need two pieces of information:

  • The estimated value of the car
  • The outstanding balance on your car loan

To get a good estimate of your car’s value, go to automotive websites like Edmunds and Kelley Blue Book because they have tools for calculating your car’s trade-in value. Basically, you need to input information about your vehicle, such as year, make, model, and mileage.

Knowing your outstanding car loan balance is as simple as calling your lender. You can either call them via phone or log in to your lender’s website to view the amount that you owe.

If your car’s estimated value is lesser than the amount you owe on your loan, the difference is your negative equity. It’s as simple as that!


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Options for Trading in a Car with Negative Equity

Having negative equity is not the end of the line. In fact, there are numerous ways on how to trade in a car with negative equity. We highly advise that you proceed with caution. Examine your options and pick the right solution for your current financial situation.

Option #1: Roll Over the Negative Equity into a New Car Loan

Sometimes when you trade in or buy a new car, dealerships will promise to pay off the remainder of your loan. While this may seem like a good idea, it’s arguably the worst option if you’re on negative equity.

However, it’s still an option.

If you choose to roll over the negative equity into a new car loan, the dealership will pay off your lender to satisfy the loan. However, you can expect that they will either add the negative equity amount to your next loan or subtract it from your down payment. Perhaps, they’ll add a fee or two for good measure.

The hardest part about this option is that you’re starting a brand new loan with negative equity. This puts you at a greater risk of going underwater again on your next loan. The vicious cycle continues.

Option #2: Roll Over the Negative Equity into a New Lease

This is an option only if you’re looking to lease your next vehicle. The main benefit is that you don’t have to continue paying for the negative equity once the lease ends. However, you’ll likely have to pay more for your lease payments.

Compared to the first option, rolling over the negative equity into a new lease is often a better idea since you don’t have to worry about going underwater with a car lease.


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Option #3: Pay It Off

If you can afford it, you can straight up pay off the negative equity. This is certainly the better financial solution than the first two options since you’re actually getting out of your debt and going above-water, as opposed to passing it on to a new loan.

This means making a lump sum payment for the difference between your outstanding loan balance and the estimated value of your car.

Option #4: Sell the Car Privately

Remember that you have other options than trading in your car at a dealership. Selling your car in private may not be the easiest way (in fact, it’s the hardest), but it certainly is the most lucrative.

Depending on the vehicle, a private sale can mean a difference of thousands of dollars versus a trade-in offer. If you can manage to sell the car to a private-party buyer at a higher price, it could be enough to offset your negative equity.


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Option #5: Hang Onto Your Car

Ironically, delaying the trade-in is your best option on how to trade in a car with negative equity. If you can hang onto your car until you’ve completely paid off your loan, you can put your previous car payments towards the downpayment of your new vehicle.

Obviously, this isn’t an option for everyone, especially if you need a new car right away or if your current one requires costly repairs. At the very least, consider the cost of repairs versus the long-term financial benefits of keeping your old car.



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