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Trading in a Car With Negative Equity: Everything to Know

Trading in a Car With Negative Equity: Everything to Know

Trading in your old car is an excellent way of reducing the amount you’ll need to borrow for the new car. But what happens if you have negative equity on your existing car loan?


Negative equity is where your car is worth less than the car loan you used to buy it. This can happen if you buy new and then want to trade in within the first year or two. As interest is front-loaded, the amount of the loan principal you pay off is lower, so it takes longer to hit positive equity.


Combine with depreciation and you have fertile ground for negative equity.


Usually, negative equity isn’t an issue as things even out as the loan progresses. It’s only if you want to trade in early that it becomes an issue.


Can You Trade in a Car With Negative Equity?

You can still trade in a car with outstanding finance and even with negative equity. You have three main options, pay off the difference yourself, roll the negative equity into a new car loan or wait until you’re even again.


Only two of those options get you what you want but there are three viable options there.


  • Pay Off the Negative Equity: Paying off the negative equity to even things up is a viable option if you have the money. Depending on the difference between your loan settlement figure and the car’s value, you can simply offer to pay the difference when you do the deal.


  • Roll the Negative Equity Into a New Loan: Some lenders will let you add the amount of negative equity into your next car loan. For example, if your car is worth $12,000 and you owe $15,000, you can add the outstanding $3k to your next loan.


This is a viable option but could worsen negative equity even more next time. You’re going to have to do the math with this one to make sure the new loan with the higher amount is still affordable.


You also have to make sure that the original loan will be settled with the new one. Just make sure settling your current car loan is in the sales contract and that you’ll only be liable for a single loan.


  • Wait: The final option is to hang fire on the new car purchase and wait a while until you’re no longer in negative equity. This doesn’t get you what you want but it can prevent further complicating your life or getting further into debt.


If you don’t have the cash to settle the negative equity, we recommend waiting until you’re a little further into your existing loan. Unless there is a compelling reason why you must trade in now, it’s preferable to keep loans simple and manageable.


If you do have a compelling reason and need to trade in with negative equity, our Beamsville car loan experts are only too willing to help.


When you’re ready for a car loan, get in touch with the car loan experts at Northway Ford for great deals on auto finance.

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