Trading a car with high negative equity
These days, it seems like things are losing value faster than ever before, especially expensive ones like cars. When you need to trade in your vehicle but have high negative equity, it can feel like you’re up against a brick wall. Do not be afraid! This situation is more common than you might think, and there are several ways to get out of an auto loan with high negative equity.
Having negative equity is common
Negative equity – also known as being upside down or underwater – occurs when you owe more on your car loan than the value of the vehicle. This most often happens at the start of an auto loan, especially if you are financing a new car. On average, new vehicles lose about 20% of their value in the first year of ownership.
If you are starting out with high negative equity, it can sometimes be difficult to bridge the gap between the value of the car and the loan balance by the time you are ready to trade in your vehicle. For this reason, it is common for many lenders to allow you to “carry over” your negative equity into your next loan.
Carrying over your negative equity simply means that a lender allows you to buy another car now, while they add the remaining balance of your existing loan (which they pay off) to the new loan. This makes your new loan more expensive, which means you pay more in interest charges and maybe see a higher monthly payment amount, even if you stretch the term of your loan (which is not. not recommended with bad credit).
Not all lenders are willing to roll over someone’s negative equity, but many are. Even if you can accomplish a transaction with high negative equity, this is not the most affordable or the wisest option, especially if you have bad credit.
Determine the amount of your equity
Before discussing alternatives to carrying negative equity, you should make sure you know the current estimated value of your vehicle and how much you owe your lender. The less negative equity you have, the better off you are.
In order to see how much negative equity you have, you must first contact your lender or log into your car loan account and get a 10-day repayment quote. This amount gives you the balance of your loan with 10 days of interest included. Then get an estimate of the value of your car by visiting an online valuation site such as Kelley Blue Book or NADAguides.
These sites give you an estimate of the value based on the information you enter, so be honest with your answers. If you underestimate the mileage or damage to your vehicle, the dealership may offer you an offer much lower than the estimate.
Manage high negative equity
If you find out that you have a high amount of negative equity, a smart option is to reduce the amount of negative equity in your car before you trade in your vehicle.
Every payment you make can get you closer to a position in stocks. To really gain momentum, you need to make the biggest payouts possible, as often as possible. Today, most car loans are straightforward interest-bearing loans, which usually means there is no penalty for prepayment of the loan, but read your contract details to be sure.
When additional payments are not an option, you can choose to pay off the difference between the actual cash value of your car and the amount you owe. When you go this route, you still trade in your vehicle with a new lender, but the new lender will only pay your current lender for the value of the car, and you are responsible for paying the rest. It doesn’t help you financially in any way, but it does get you out of your current loan.
If another vehicle isn’t a serious emergency, waiting for it is always an option, as each payment automatically reduces the amount of negative equity your car is carrying. When you’ve made enough payment to break even, or have equity in the vehicle, you may want to consider trading it in.
If rolling is your only option
Trading a car with high negative equity may be your only option if you need another vehicle now and can’t wait to get a position in stocks. Since carrying over negative equity will increase your new loan balance, we’ve got a few tips for getting out of the recovery treadmill before you end up with more negative equity than you can handle.
If you are renewing a negative principal auto loan, be sure to:
- Make the biggest down payment possible – This way, you borrow less and there is less money to pay interest on, saving you money over the life of your loan.
- Take the shortest possible loan term – If you you find yourself extending the term of your loan at seven or eight years old just to get an affordable payment you might want to reconsider. The longer you take to repay a loan, the more it costs you in the long run.
- Go for an affordable car – If you can easily afford your car loan, great! Don’t fall into the trap of buying a more expensive vehicle just because you can. If there is no reason to upgrade, you should wait, because now is not the time to get the car of your dreams if your credit is poor.
- Choose a vehicle that keeps its value – Different cars depreciate at different rates. Some makes and models are known to hold their value longer than others, which may give you a better chance of closing the equity gap.
Ready to trade in for your next auto loan?
Now that you know it’s both possible and common to roll over your high negative car loan equity when looking for a vehicle, it’s time to find a place to trade.
When you are struggling with credit issues, you need to make sure you are working with the right kind of lender who can help you. Working with a subprime lender through a special finance dealer can often be a good option for people who need a car loan with bad credit, and Express auto loan can help you find one near you.
We have developed a network of dealers across the country who have signed up with the lenders you are looking for. To get started, complete our free and easy auto loan application form. After that, we’ll get to work finding a local dealership so you can trade in your car!