By Anthony Santiago - Editor-in-Chief

June 7, 2023
negative equity trading in car

Are You Upside Down on Your Vehicle?

Today's financial climate and the automotive market are wild. With car prices still high and loan defaults on the rise, it's not surprising that you might find yourself underwater or upside down on your vehicle.

This means that you owe more than what your vehicle is worth. I will cover your options and the best option based on your circumstances.

Key Takeaways

  • What is Negative Equity on a car or vehicle? Negative equity means you owe more on your car loan than your car is worth. As a result, it will make it more difficult to trade in your car and may leave you with more financial obligations.
  • How to Calculate Negative Equity: To calculate negative equity, you need to find out your car's current value and current car loan balance. Subtract the value of your car from the loan amount to determine your estimated negative equity.
  • Your (3) Options: If you have negative equity, there are three options you can consider. 1. Delaying the trade-in. 2. paying off the negative equity 3. rolling it into a new car loan. Rolling into a new loan will put you in the financial hole, so be prepared.
  • Understanding Negative Equity

    Negative equity is bad. It is known in the automotive industry as "upside down" or underwater on your car loan. 

    Negative equity is when your vehicle's value is less than the outstanding balance on your car financing loan. This could happen for various reasons, from your monthly payment size, automotive market shift, vehicle age, and condition. 

    You can trade in your car to get out of negative equity, but you should still get fair market value for it.

    Remember, dealerships are there to be profit centers. I'm not saying all dealerships are bad or lowball, but you must do your homework to be better equipped to trade in or sell your car privately. 

    When dealerships advertise that they will pay off your loan, you need to ensure that your negative equity is not rolled into your new loan. If so, it should be disclosed to you. 

    If your negative equity is rolled into your new loan, you might start with the same problem with your vehicle. 

    Calculating Your Negative Equity

    Yes, knowing that you might owe more on your vehicle than what it's worth is painful. 

    However, not everything is doom and gloom. Remember that the car is worth what the market is willing to pay. However, KBB does provide a pretty accurate number when it comes to market value. 

    Let's figure out what your actual negative equity is. 

    Estimating Your Car's Value

    Go to KBB and click "My Car's Value," then input your vehicle's specifications. You might be able to input based on your VIN, but if you don't have it, click on next. 

    Input your vehicle's year, make, and trim level. Then you can select the options for your vehicle. 

    TIP: Look for any special features or options to increase your vehicle's worth. Be truthful about the overall condition to get true market value accurately. This includes any damage or issues that you know of.

    It will calculate your trade-in value. This number is lower than the private party, but we will use both numbers to determine the best path forward. I usually select very good or excellent if your vehicle is like new. 

    Keep in mind that trade-in values usually won't match private sale prices.

    If you need repairs, then I would select "Good Condition." If your vehicle is in rough shape, I suggest getting it fixed and selling it privately.

    Write down both numbers and ranges. 

    Next, we will review your automotive loan amount.

    Determining Your Car Loan Balance

    The current balance on your loan amount determines if you have negative equity on your vehicle. 

    To calculate your car's negative equity accurately, check the current balance on your loan online or call your financial institution for the pay-off amount on the vehicle. 

    TIP:  Your loan provider can provide information about the current outstanding balance, including any interest or penalties accrued since taking out the loan.

    You can also use a negative equity calculator. BankRate has an easy one to use (See below).

    negative equity calculator

    Then you will subtract the loan amount from the estimated value of your car from the previous section.

    For example, if your outstanding balance is $18,761 on your loan but your KBB market value is $17,092 private party and $15,881 Trade-in, you are in the negative equity of $2,880 on your loan. 

    You are responsible for this amount when you get rid of your vehicle. 

    Trading in your car with negative equity is like trying to sell an underwater house - it's a sinking feeling.

    I will now cover your options in the following section. 

    Your Trade-In Options

    Exploring all available options is important when considering trading in a car with negative equity.

    1. Delaying the Trade-In

    The first option is to delay the trading until you are ahead in your equity.

    If we take into account the -$2,880 equity, you might consider putting more money towards your balance to "catch up" with the value of your vehicle. 

    You can delay the trade-in to decrease the negative equity of a car. This allows for more time to pay off the loan and save money. The vehicle's depreciation will slow down and work in your favor.

    The trade-in can also be delayed by paying off negative equity out of pocket. 

    This method may require some financial discipline but can work best for those with large sums of money available. Like with additional payments, it's important to check for any prepayment penalties since some financial institutions may have this in place. Check before choosing this route.

    As I always share with my readers, there will always be another opportunity to purchase a new vehicle and get rid of your current one. Don't get too emotional about getting a new vehicle if it means losing money in a negative equity situation.

    2: Paying Off the Negative Equity

    Another option is to pay off the negative equity before trading in the car. Paying off negative equity may hurt your wallet now, but it's better than a long-term loan with greater financial risks.

    Paying off the negative equity is a beneficial option when trading in your car. This involves eliminating the outstanding balance of your current car loan, allowing you to start fresh with a clean slate. 

    Remember, when choosing this option, you need to check about any prepayment penalties.

    Plus, paying off negative equity allows you to negotiate for better deals. Dealerships can work with you to negotiate a deal since they understand that the overall financial risk is lower.

    3: Rolling Negative Equity into New Car Loan

    While this is an option, I don't recommend it. Rolling negative equity into a new car loan is one option to consider when dealing with negative equity in car trade-ins. 

    Rolling the debt of the unpaid balance of the old loan to the new car's loan effectively spreads out the negative equity over the life of the new loan. This isn't good, but it is an option for you. 

    Let's review the impact and implications of this option long term.

    Rolling over negative equity could lead to a higher interest rate or longer-term debt obligation because the loan amount is larger. My general rule of thumb is never to jeopardize your financial health for a vehicle. 

    It might seem like an easy option, but check with the contract line item and ensure the loan amount doesn't include your negative equity. 

    TIPS: Rolling over negative equity into a new car loan is like putting a band-aid on a broken leg; it may hide the problem but doesn't fix it.

    The dealership should be able to work with you to an agreed trade-in value that is fair for both parties. 

    4. Trade-In Alternatives: Selling Your Car Privately

    Another alternative to your Trade-In is selling your vehicle privately.

    There are a few upsides, like better value and price for your current vehicle. However, there are some downsides to it. 

    Disadvantages if this is your first time selling a vehicle.

    • Multiple buyers - Some might flake and not attend the test drive.
    • Inconvenience - Finding a buyer will take more effort, but it can put hundreds, if not thousands, of dollars in your pocket.
    • Safety - You do have to deal with strangers, so you can check out my article on how to sell a car privately in under 2 weeks. 

    It's important to weigh each option's pros and cons to decide which is the best fit for your needs.

    Selling your car or vehicle privately will yield you the most money. But trading into the dealership adds a layer of convenience to a one-stop shop. 

    Always do your research and consider other alternatives before trading in your car.

    Lastly, disclosing any major issues or damages to your car is important when selling it privately. You should always maintain transparency and avoid potential legal issues. This is good business practice for both parties. 

    Final Thoughts on Making Smart Decisions Trading in with Negative Equity

    With negative equity, I suggest you weigh all of your options while trading a car.

    Most financial experts would advise not to overspend on new vehicles. If your vehicle is still working fine, wait until your loan balance and the vehicle's value are positive. 

    Be patient, as there will always be an opportunity to buy a vehicle, and choose wisely. Your financial situation will improve as long as you take your time. 

    Aim to minimize the damage of negative equity by managing any outstanding debt better. 

    You could sell your car via a private party to maximize revenue or consider paying off as much as possible. The choice is yours. 

    Consider your options and keep emotions aside to make sound decisions. Choose the best path to avoid any regret and longer financial obligations. 

    FAQs : Car With Negative Equity

    What is negative equity? What are the financial risks in trading in a vehicle with this? 

    Negative equity refers to owing more on your car loan than what your car is currently worth. This can make trading in your car financially difficult as it may require a chunk of money out of your pocket to pay off the negative equity.

    How can I calculate the negative equity in my vehicle?

    You can figure out your negative equity by subtracting the amount you owe on your car loan from your car's estimated trade-in value. Third-party automotive websites like Kelley Blue Book and Edmunds can help you estimate your car's value, and contacting your lender can help you determine how much money you owe on your loan.

    What are my options for negative equity when trading in my car?

    You have several options if you have negative equity when trading in your car. You can delay the trade-in until you're no longer upside down on your loan, pay off the negative equity out of pocket, roll the negative equity into your new car loan, or sell your car privately.

    What does it mean to delay the trade-in?

    Delaying the trade-in means waiting until you're no longer upside down on your loan to trade in your car. You can do this by saving up enough money to pay off your loan or paying extra to reduce your negative equity.

    Is it good to roll the negative equity into a new car loan?

    Rolling the negative equity into a new car loan can be convenient as it doesn't require paying off your negative equity out of pocket. However, it usually means borrowing more on your next loan than your new car is worth, putting you at higher risk of becoming upside down on that loan and paying more in interest.

    What should I watch out for when trading in a car with negative equity?

    When trading in a car with negative equity, be wary of dealers who promise to pay off your existing car loan as part of a trade-in but roll your balance into your new car loan or deduct it from your down payment. This can increase your loan costs, so review your sales contract carefully before signing.

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    Anthony Santiago - Editor-in-Chief

    About the author

    I am a passionate car enthusiast who likes to help people save money and avoid headaches when it comes to cars. I believe that everyone can find the right car at the right price. I share my tips and experience so you can learn quickly and maximize your next SUV, truck or car purchase.

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