How To Trade In A Car With Negative Equity: Your Options

man considering how to trade in a car with negative equity

You’re ready to trade in your vehicle, but what do you do if you owe more to the bank than it’s worth? This is when you have to decide whether to keep your vehicle or learn how to trade in a car with negative equity. 

While it might not be as cut and dry, you can still trade in your car to a dealership; you just have to know how to navigate the process best. 

What Is Negative Equity?

Equity in a vehicle is determined by subtracting how much is owed on the car and its value. Having negative equity on a vehicle isn’t the best state to be in because you will wind up paying more than it is worth. However, this shouldn’t stop you from trading it in. 

When you trade in a car with negative equity, the equity will likely roll into your new vehicle loan. Here’s an example…

If your current vehicle has $10,000 in negative equity and your new car costs $20,000, you will take out a $30,000 loan from the lender. $20,000 will cover the cost of your new vehicle, while $10,000 will cover the negative equity on your trade-in. 

Steps For How To Trade In A Car With Negative Equity

If you’re ready to trade in your car with negative equity, here’s the general process to keep in mind. 

Calculate your equity

The first thing you want to do is calculate how much negative equity you have. To do this, start by contacting your lender to get a payoff quote. Next, get the trade in value for your vehicle. You can usually use a tool like Kelley Blue Book to find an estimated value. 

Another option is to take your vehicle to a dealership to get an actual trade in value. Once you have these two numbers, subtract the payoff quote from the value of the car to determine the amount of negative equity. 

(Trade in Value) – (Payoff Quote) = Vehicle Equity

Once you determine your vehicle’s negative equity, that is the amount that will likely be rolled over into your new auto loan for your next vehicle. 

Estimate your financing

When you trade in a vehicle with negative equity, you will automatically be responsible for paying more because your loan will also include the negative equity. To get an idea of how much your loan might be, you can use an auto loan calculator that takes estimated factors such as the APR, loan term, trade-in value, etc. into consideration. Although the terms will be estimates, it can help you get an idea of how much you might expect to spend on your new auto loan. 

Get a preapproval

Getting a preapproval is a good idea when buying a car, whether your vehicle has negative equity or not. But, especially since you will have to finance more due to the negative equity, you want to secure the best rates and terms possible to make your loan affordable.  

To ensure that you get the best rates, you want to apply with at least three different lenders. Once you get a response from all lenders, compare their offers to select the loan with the best terms. 

As long as you complete all of your applications within a short period, usually 45 days or so, your applications will all count as one hard hit, so your credit won’t be impacted as much. 

Find a dealership to trade in your vehicle

Once you secure financing, you can find a dealership to trade in your car. Most dealerships will accept your trade-in if it’s in good condition. Just like you’d submit a preapproval application with multiple lenders, you should do the same when seeking trade-in values to find the best offer. 

Additional Tips For Trading In A Car With Negative Equity

Along with completing the basic process listed above for trading in a vehicle with negative equity, there are other tips to consider. 

Improve your credit score

The higher your credit score, the better terms you will qualify for with your auto loan. So, if you can take the time to improve your credit score before going through the preapproval process, you are likely to score better terms for your loan. This might include doing things such as decreasing your debt, pulling your credit report and correcting inaccuracies, making sure all of your accounts are out of default/collections, etc. 

When you estimate your financing, be sure to input different APRs to see how a couple of percentage points can drastically change how much you pay in interest for your loan. That’s why taking this step is crucial. 

Consider a cheaper car

Since your costs will be higher when trading in a vehicle with negative equity, you might want to consider purchasing a more affordable vehicle. This will keep your expenses lower and allow you to balance how much you owe on your new car and how much you’re responsible for paying to cover your trade in. 

Pay off the negative equity

While you might not be able to cover the full cost of your negative equity, any amount you can pay in advance will help to offset how much you have to finance with your new loan. Many lenders will allow you to make additional payments toward your loan’s principal balance. The less you finance, the better.  

Learn More About How To Trade In A Car With Negative Equity

If you believe that trading in your car with negative equity is a good next step for you, be sure to learn more about the process from the lenders you’re considering. 

At Atlantic Financial Federal Credit Union, we help our members complete many of their auto loan purchases, including negative equity trade-in loans. 

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