How to Trade In a Car with Negative Equity: Trade Wisely
Trading in an old car is beneficial, especially if you are looking for a new vehicle. But you might be wondering how to trade in a car with negative equity. Although this situation is common, it does not mean that you can’t sell the car. Read this guide thoroughly to learn what negative equity is on a car, how to access negative equity, and how to trade in a car with negative equity.
Table of contents
- What is negative equity on a car?
- How to Assess Negative Equity Before Trading in Cars
- How to Trade in a Car with Negative Equity: 4 Options
- How does negative equity affect your trade-in process?
- What happens when you roll out negative equity into a new loan?
- How to Minimize Negative Equity When Trading in a Car
- Conclusion
- FAQs
What is negative equity on a car?
Negative equity occurs when the price you owe on your car loan is higher than the current value of the car, for example. If the worth of a car is $7500 and the amount you still owe is $9000, then you have $1500 in negative equity on a car. Do you know why the negative liquidity happens? Here are three common reasons.
Depreciation
Depreciation is one of the most common reasons for negative equity in a car. Depreciation occurs when the value of your car drops due to the arrival of new models or other reasons. Generally, the car loses its value in the first few years. Due to this reason, it is common to owe more than the car’s worth early in the loan term.
Long-term loans
Leasing the car on a long-term loan also contributes to the negative equity. If your leasing duration is around 5-6 years, you may be paying a much higher price than the real value. This way, your car value will be much lower than you owe, even after making several payments.
Low down payments
Another factor for negative equity is making small or no payments when leasing a car. A low down payment increases the amount and duration of the lease, which results in negative equity. So, with the passage of time, the car loses its value, and it goes very below the remaining installments. So, it is best to know what negative equity is and what causes it before buying the car.
How to Assess Negative Equity Before Trading in Cars
Before you trade in a car with negative equity, it is important to understand how much it will impact. Here are the steps to assess negative equity:
Determine the current value of the car
The first step is to estimate the current value of your car based on its condition. You can either get estimates from online experts or platforms like Kelly Blue Book. The best and most accurate way is to take your car to an expert car dealer for price estimation based on its model, age, and condition.
Check your loan balance
Check out the remaining loan amount to assess the negative equity. To find this information, you can either check the monthly loan calculator or contact your lender. Calculating the remaining loan balance is the key to knowing how to trade in a car with negative equity.
Calculate the difference
Now, subtract the current value of your car from the remaining loan. If the output price is negative, that is the negative equity of your car.
For example, if the current worth of the car is $5000 and the remaining loan is $6000, the negative equity is $1000.
How to trade in a car with negative equity: Find out options
When selling your car with negative equity, you might wonder: Can you trade in a damaged car? The answer is yes, but you will have to face price deductions. There are many options to trade in your damaged or well-maintained car with negative equity. Some of the options are:
- Postpone the trade until the remaining loan becomes lower than the car value.
- Pay off the negative equity upfront.
- Roll the negative equity into the new vehicle.
- Avoid extra costs
Below is a brief overview of each of these options.
How to Trade in a Car with Negative Equity: 4 Options
There are four options to handle the negative equity when trading in your car:
Buy time: Postpone your trade-in
If you are not selling cars urgently, waiting for some time is a good option. Wait for a few months or years until you pay the remaining loan, and the negative becomes less. This way, you will owe less or no money when trading in a car with negative equity.
Pay off your debt: clearing negative equity
Still wondering how to trade in a car with negative equity. Paying off all your negative equity is another option. To do this, you can either save extra money or make larger monthly payments. This process may take time, but you can ensure that negative equity will not roll into a new loan.
Roll negative equity into a new car
If you are unable to pay off your debt in advance, ask the dealers to roll the negative equity into a new loan or car. This way, the amount you owe on your old car will be added to the price of your new vehicle. The downside is that this process is risky. Rolling negative equity will increase loan balance, which results in high monthly payments.
Avoid extra costs when trading in a car with negative equity
When trading in a car with negative equity, make sure that you avoid extra costs. For instance, if you roll the negative equity into a new load, you will have to pay more interest. Also, some dealers may offer less money when they know about the negative equity.
So, choose the best option based on your preferences, financial situation, and negative equity value. Moreover, if you have purchased the lifetime guarantee car, also consider this when trading in the car or paying negative equity.
How does negative equity affect your trade-in process?
The negative equity impacts the loan terms of your next car. The impact increases if you roll the negative equity into your new loan. If your remaining loan is more than the car’s worth, you might have to find a way to make up the difference.
What happens when you roll out negative equity into a new loan?
You can face several challenges when rolling out the negative equity into a new loan. Here are a few challenges:
Higher monthly terms: Rolling out the negative equity will increase the loan amount on your next car. This way, the monthly loan payments will be higher and even exceed your budget.
Increases loan term: Due to the increase in loan amount on your next car, the loan duration will also increase. The high loan term also results in more interest, which increases the cost.
Continued deprivation: Keep in mind that car value always decreases over time, even if you roll out the negative equity. Therefore, when trading in a damaged car, you will have to bear some price drop.
How to Minimize Negative Equity When Trading in a Car
To avoid negative equity in the future, here are some good tips:
Save for a larger down payment
Paying the large down payment reduces the loan payment, interest rate, and negative equity. The more you pay the upfront price when leasing the car, the less negative equity you will have.
Shop around for better loans
Before buying the car, do some research and choose the dealer who offers the best loan terms. Look for dealers who offer lower interest rates and shorter terms.
Choose a vehicle with slower depreciation
Try to buy a car with the minimum depreciation value, like a used or new car with high demand. Moreover, try to keep your car in good shape and protect it from internal and external damages like hail damage, accidents, tree sap, etc. If your car’s body is damaged due to hail damage, you must find an answer to the question: Is it worth fixing hail damage on a car?
Pay off your loan faster
Paying off your loan earlier than the agreed-upon period helps to reduce negative equity. Early loan payment also helps to reduce the interest rate on a car.
Conclusion
Knowing how to trade in a car with negative equity protects you from financial loss. The best options are to postpone the car trading, pay off the debt in advance, roll negative equity into the next car, and avoid extra costs like more interest. No matter which option you choose, make sure you weigh the pros and cons.
FAQs
Can you trade in a car with negative equity?
Yes, you can trade in a car with negative equity, but it requires some steps. You will either have to pay the negative equity upfront or roll the equity into your next car.
What happens if you trade in a car with negative equity?
When you trade in a car with negative equity, the amount you owe on the old car is added to the new loan. The other option you can choose is paying the remaining loan amount upfront. For example, if you owe $2000 more than your car is worth, that $2000 will be added to the price of your new car.
Is it worth trading in a car with negative equity?
It depends on your financial situation and personal preferences. If you want a new car and avoid the hassle of repairing an old one, it might be worth it. Before making the final decision, compare the pros and cons of both options.
How can I avoid negative equity on my next car?
Some of the options to avoid negative equity are paying a large down payment when buying a car, selecting a vehicle with a low depreciation value over time, and choosing a short-term loan plan.
Can refinancing help with negative equity?
Yes, refinancing can help you reduce the negative equity on your car. If you are able to shorten the loan and reduce the interest rate, negative equity will be reduced. However, this option is only beneficial if your negative equity is too high.
