Trading in a car for which you owe more than it’s worth can be quite costly. Although the dealer may tell you it is willing to pay off your old loan -- and this is technically true -- most incorporate negative trade-in equity into the new loan. Therefore, in addition to paying for the new vehicle, you also continue paying on the old loan, which in turn increases the term and monthly payment. Although the most cost-effective option is to wait until you’re in a positive equity position, there are tactics that can lessen the financial impact.
Assess the Situation
Determine how far upside-down the loan is before you start shopping. Review the amortization schedule that came with your loan documents or contact your lender to get the current payoff. Next, find out how much you can reasonably expect to get during trade-in negotiations according to your vehicle’s age and condition. Appraisals tools on Internet sites such as Kelley Blue Book and Edmunds are helpful for accomplishing this task.
If you don’t have a specific make or model in mind, look for vehicles that have incentives such as a cash-back allowance, a loyalty bonus, college graduate or first-time buyer discount, or low-interest financing. As an alternative -- especially if you’re purchasing a used car -- look for deals like an extended warranty or a free gas deal that might reduce long-term ownership costs. Although these may not eliminate negative equity, they can make it less expensive in the long-term.
Roll the Negative Equity
Roll negative equity from a trade-in into a new loan after getting the information necessary to make an informed decision. Use an online negative equity auto loan payment calculator to find the long-term costs. The Federal Trade Commission recommends that you also ask the dealer specifically how negative equity is being treated in the deal. Read the contract carefully, and don't sign it until you fully understand all of its terms and conditions.
Keep the term of the new loan as short as your budget will allow. The longer the loan, the more expensive negative equity becomes. Interest rates also make a big difference, so if the economy or your credit rating results in a loan with a high interest rate, look into refinancing after the first year. Edmunds suggests that you first check with your bank or credit union. Then, compare the rate and term with other local banks and online lenders. Most banks and online lenders have auto loan refinance calculators that help you estimate your savings and compare interest rates.
- Photo Credit Barry Austin Photography/Photodisc/Getty Images
How to Determine the Equity in a Car
How to Buy a New Car with Negative Equity in a Trade In; How to Know the Equity of Used Vehicles; Comments...
How Much Negative Equity Can Be Financed in a Used Car?
The amount of negative equity a borrower can roll over into a used car loan differs by individual credit history and lender-determined...
How to Get Rid of a Brand New Car
Sell your brand-new car if you need to make money. For many people this is the best option, because it gives them...
How to Get Rid of Negative Equity Cars
How to Buy a New Car with Negative Equity in a Trade In; ... Even if your vehicle has negative equity, you...
How to Trade for a New Car
Comments Video Transcript. CATHY DROZ: The truth is most people do trade-in their present vehicle for a brand new car. So in...
How to Trade a Car That Still Has Payments Due
Since you have an idea of how much negative equity you have on the car, you can either see if the dealer...