What Are Your Trading Options With Negative Equity?
At Blake Ford, many of our customers come to us wanting to trade in their current vehicle, only to find they owe more than it’s worth. This situation, known as negative equity, often arises with an auto loan when the remaining balance exceeds the vehicle’s current value, making trading in a vehicle seem daunting. But with the right approach and understanding, it’s possible to move forward successfully. In this guide, we’ll explain negative equity trade-ins and what to expect from the process. Visit us today in Franklin, VA!
Understanding Negative Equity
Negative equity occurs when you owe more on your car loan than the car is worth. This is common for vehicles that have rapidly depreciated or for loans that were structured with minimal down payments or long terms. For example, if you owe $26,000 on your car loan but the car is only worth $20,000, you would have $6,000 in negative equity.
Many factors can contribute to negative equity, including long loan terms, high interest rates, or rolling over a previous loan balance from an older car. The key thing to understand is that while this complicates the process, you still may be able to undergo a negative equity trade-in.
Determining Your Equity Position
Before you begin the negative equity trade-in process, you need to determine exactly how much negative equity you have. This is the first critical step in understanding your situation and determining the best course of action. Start by getting an accurate appraisal of your vehicle’s trade-in value. You can use online tools like Kelley Blue Book, but the most reliable method is to visit a dealership like Blake Ford for a professional appraisal. Once you know your vehicle’s current value, the next step is to contact your lender for the exact payoff amount, or the total still owed on the car. The difference between these two amounts will give you the figure for your negative equity trade-in. For instance, if your car is worth $20,000 and your loan payoff is $25,000, you have $5,000 in negative equity.
How to Trade In a Car With Negative Equity
Once you have a clear understanding of your negative equity, the next step is to figure out how to move forward. The most common solution is to roll over the negative equity trade-in into your next vehicle loan. This simply means that the remaining balance from your current loan is added to the new loan for your next car.
For example, if you want to purchase a car for $30,000 and you have $5,000 in negative equity, the total amount financed for your new car would be $35,000. While this approach allows you to trade in your current vehicle and purchase a new one, it’s important to remember that your new loan amount will be higher, which could result in higher monthly payments.
When considering a negative equity trade-in, assessing whether the new loan will be affordable and the right financial decision is crucial. Making extra payments on your existing loan can help lower the principal more quickly, easing your financial strain and enhancing your circumstances before you consider a trade-in.The best approach is to work with your dealership and financial advisor to ensure that the terms are manageable and that the new car will be worth the added cost.
How Much Negative Equity Can I Roll Over?
One of the most common questions customers ask when faced with negative equity is, “How much negative equity can I roll over into a new loan?” While there is no strict cap on this amount, lenders will evaluate your financial situation before approving a rollover. The amount you can roll over from your negative equity trade-in will depend on several factors, including your credit score, income, the new vehicle’s value, and your overall loan-to-value ratio. Generally, the more negative equity you have, the harder it may be to get approval for a rollover, especially if the new loan amount exceeds the value of the vehicle you’re purchasing.
Best Way to Trade In a Car With Negative Equity
Trading a car with negative equity requires careful planning and strategic decision-making. The best way to do so is to approach the situation with a clear understanding of your financial position and explore all available options. Here are some strategies that can help you manage negative equity more effectively.
Making a Down Payment
If possible, use cash to reduce the amount of negative equity being rolled over into your new loan. This can lower your loan balance, reduce your monthly payments, and improve your loan-to-value ratio. Additionally, paying off the remaining balance from your own pocket can eliminate negative equity. Making additional payments towards the loan principal can also help you pay down the loan faster, improving your financial standing.
Choose a Less Expensive Vehicle
Choosing a lower-cost vehicle can help minimize the amount of negative equity that needs to be rolled over into your new loan. At Blake Ford, we can help you identify vehicles with good resale value that won’t depreciate as quickly, helping you avoid getting into a similar situation down the road. Considering a used car, particularly one that is a year or two old, can be a financially responsible option due to lower depreciation compared to new cars.
Wait A Little Longer
Making a few additional loan payments could reduce the amount of negative equity and improve your trade-in options. At Blake Ford, we are happy to review your situation and give you advice on whether waiting or trading in sooner makes the most sense for you. Delaying the trade-in can be the better option financially if you are able to wait, as it allows you to reduce negative equity more effectively.
Ready To Trade In?
Negative equity trade-ins can be a bit more complex than a traditional trade-in, but it’s far from impossible. By understanding your equity position, evaluating your loan options, and working with a dealership that can help you navigate the process, you can make the best decision for your next vehicle purchase. At Blake Ford, we specialize in helping customers in all financial situations. We’ll work with you to assess your options, offer clear and straightforward guidance, and find a solution that puts you in a vehicle you love without putting you in a deeper financial hole. If you’re still curious to learn more about negative equity trade-ins, don’t hesitate to reach out to our team. We’re here to help you make an informed decision and take the next step in your automotive journey. Visit us today in Franklin, VA!
