Trading in a Vehicle With Negative Equity

You can trade in your car with negative equity by rolling your current loan into a new loan, selling the car privately, or waiting to achieve positive equity.
Written by Drew Waterstreet
Reviewed by Carrie Adkins
Negative equity occurs when the outstanding balance of your auto loan is greater than the current value of your vehicle. If you want to trade in a vehicle with negative equity, you can roll your old loan into a new one, wait until you achieve positive equity, or sell the car privately. 
Having negative equity on your vehicle is not as scary as it sounds, and it’s actually very common in the auto industry due to the natural depreciation cycle. Although it’s recommended that you obtain positive equity before trade-in, that’s not your only option.
If you’re wondering how to trade in your car with negative equity, the
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Understanding negative equity

More likely than not, your vehicle will be one of the larger purchases you will make throughout your life, and taking out a loan to finance that vehicle purchase is common practice. 
Negative equity occurs when the balance of the outstanding loan is greater than the current value of the vehicle itself.
For example, if your loan balance is $7,500, but the vehicle is only worth $5,000, your negative equity would equal $2,500.

The economics of depreciation and negative equity

Having negative equity does not mean you are financially unstable; in fact, it is quite common to experience this at some point during your loan repayment timeline.
The rumors are true—the moment you drive your new vehicle off the dealership parking lot, it begins to substantially lose value:
  • Your vehicle’s value will depreciate by roughly 20% within the first year.
  • The vehicle will continue to lose about 15% of its value for each of the next four years.
  • A five-year-old vehicle bought at $40,000 will now be worth $16,000.
Vehicle depreciation rates often outpace your loan repayment plan. Depending on how much of the down payment you put on the vehicle, you could enter into negative equity rather quickly after your purchase. 
But don’t worry—this is normal and temporary as you continue to make payments towards your loan.
Key Takeaway To calculate negative equity, subtract your car’s current value from your remaining loan balance.

Questions to ask yourself before trading in your vehicle

Trading in a vehicle with negative equity can be complicated but certainly not impossible. Before going to the dealership to ask for a trade-in, ask yourself these questions:

What is your vehicle worth? 

As discussed, vehicles will depreciate. But don’t let a slick car salesman convince you that your car is worth less than it is.
Kelley Blue Book
and
Edmunds
are great tools for understanding your car’s current value and fair trade-in price.

Why do you want to trade in your vehicle? 

Are you trading in your vehicle just to give something new a spin? Or is it a financially motivated decision? 
If you’re struggling to make payments on a vehicle with negative equity, trading in your vehicle could allow you to downsize and receive a lower interest rate.

Evaluating your trade-in options

Now that you’ve asked some qualifying questions, you’re ready to evaluate your options!

Trade-in your vehicle once you achieve positive equity

Positive equity is achieved when your vehicle is worth more than the outstanding balance of your loan. This is the counter-narrative to the topic at hand, but it is the most financially responsible option to pursue. Going further into debt is not always the right decision.
By paying more than your monthly minimum and/or committing more money towards principal-only payments, you’ll work your way towards achieving positive equity. It’s more fun to trade in a vehicle when you have money to spend anyway.

Rollover your negative equity into a new loan

Rolling over your negative equity into a new loan can either put you further into debt or be used as an opportunity to refinance. The car dealer is always going to suggest rolling your negative equity into a new loan because they will be receiving more interest on the loan due to the higher principal.

Example #1

You owe $10,000 on your car loan, and the dealer’s best trade-in offer is $7,000, meaning you have $3,000 in negative equity. Your new car costs $25,000. Combine your old negative equity with your new loan to get $28,000 as your new outstanding balance. 
But remember, the depreciation cycle begins right away, which will increase negative equity.
If money isn’t a concern and you just want a fresh set of wheels, this can be an option. If money is a concern, this option can be risky.
Alternatively, rolling over your negative equity into a new loan can be advantageous if you downsize your vehicle in the trade-in process. 

Example #2

You're in $30,000 of debt on a vehicle that’s worth $26,000. You have $4,000 of negative equity, and your new vehicle requires a $20,000 loan. After trade-in, roll your negative equity ($4,000) from your previous loan into your new loan ($20,000), and downsizing will lower your principal debt from $30,000 to $24,000.
This will lead to lower interest payments in the long run.
Pro Tip Whenever you are refinancing, try to get a lower interest rate.

Don’t trade in your vehicle, sell it on the private market

There are pros and cons to selling your vehicle on the private market and avoiding a car dealership altogether. 
You’ll often get a better offer for your vehicle if you decide to sell it privately. But, the financing options are often more limited in this case. You will also have more responsibility in the process—advertising the sale of the vehicle, providing maintenance records, qualifying buyers, and more.
MORE: Trade-in vs private sale: What’s the best way to sell your car?

How to get a new insurance quote

When you trade your vehicle in, you’ll need a new insurance policy. Let
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FAQs

Use tools like
Kelley Blue Book
and
Edmunds
to give you an idea of what your car is worth. Always do your research before going into trade-in negotiations with the car dealer.
No, negative equity is not a bad thing as long as you are making all your scheduled loan payments on time. Negative equity is actually quite common. The depreciation of your vehicle’s value will often outpace your payments at some point throughout the lifetime of the loan.
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