How to Trade a Car with Negative Equity – Explained

Can I Buy a New Car If I Still Owe Money On My Old Car?

negative equity car loanThis is a very common situation in which car buyers often find themselves.

The situation is that you want/need a new car but still have an outstanding loan on the car you intend to trade. And you know (or suspect) that the old car is not worth the amount you still owe.

What to do?

In the case where you find your old car is actually worth more than your current loan balance, there’s no problem. You trade the car, the dealer pays off your old loan, and the remainder of the trade value is applied as a down payment on your new car.

However, the more common situation is that you still owe more than the old car is worth. You’re “upside down.” The difference in the two values is called negative equity. Your options depend on the amount of the negative equity. The higher the negative equity, the fewer your options.

If you are only upside down by a small amount — a few hundred dollars or a very few thousand — a dealer might be able to “roll” the negative equity into your new car loan, which essentially increases the price of your new car, and very likely places you in an even worse upside-down situation.

Some people mistakenly think they can trade for a much lower priced car to get out of an upside down situation, but that’s usually not the case. For more details, see our article, Can I Trade My Car for a Cheaper Car?

If the amount of negative equity is too large, a dealer will not be able to “roll” it into a new loan. Lenders will not approve a loan for substantially more than the value of the new car.

Therefore, in this situation, customers must either 1) pay off the negative equity as a cash down payment when trading for a new car, or 2) forget the trade for the time being, keep the old car, and keep making payments until no longer upside down, which should occur near the end of the loan.

Summary

There is no “magic trick” to make a negative equity loan go away. It has to be paid in one way or another, either in cash, in a larger loan on a new car, or by simply paying it off by continuing to make payments, without trading.