If you have a car loan and you owe more than it is worth, you have so-called negative equity. In this situation, trading a car can be difficult financially. It is important to think carefully about options – such as continuing to pay back the loan to get positive equity in the car or replacing the negative capital with a new loan – when deciding how to implement the conversion. Some routes may cost more than others.
If you consider that a new car may lose 20% or more of its value in the first year, it’s easy to see how you can end up with a larger car loan than it’s worth.
If the amount you owe exceeds your vehicle’s worth, you have what is called negative equity. This is often referred to as getting the car loan upside down.
When you change a car that has negative capital, you have several options, but they can be expensive, and some require a large amount of money out of pocket.
Let’s look at how to find out how much negative equity you can have, along with potential exchange options.
How to calculate negative assets
If you are pretty sure that you are upside down on your car loan and are thinking of changing your vehicle, it is crucial to calculate an estimate of how much negative capital you have. You will need to know some vital information:
- The estimated value of your car
- Your car loan arrears
External automotive sites offer tools to help estimate the value of a car replacement. You just need to provide details, including the year, make and model of the car and the number of miles on the odometer.
Contacting your lender is an easy way to find out how much you owe on your car loan. You can usually find this out over the phone or by logging into your account on your lender’s website to see the payment amount. The amount of your loan payment may be different from the current balance of your loan, since it includes any interest you owe until the day you cancel the loan, in addition to the unpaid fees.
If the amount owed on your car loan is greater than the estimated value of your vehicle, the difference between the two is negative net worth. For example, if you owe $ 9,000 on your car loan and your vehicle has an estimated value of $ 6,000, you currently have $ 3,000 of negative equity.
Car Replacement Option 1: Delay replacement
When trading a car with negative equity, you have two main options: Delay the conversion until you turn upside down on the loan or move forward with the conversion and pay off the negative equity.
Delaying your exchange is generally the best financial option. But this only works if you can wait to get a new car. You can delay your exchange until you have saved enough to pay off your loan, or, in the short term, you could pay an additional loan until it is no longer backward.
Making additional loan payments only with the principal or paying more than your monthly minimum could help you repay your loan faster and reduce your negative capital. But before you do this, make sure that the terms of your loan do not include a prepayment penalty. This is a fee that some lenders charge borrowers who repay their loans earlier than expected.
Auto Swap Option No. 2: Pay Negative Net Worth
Pay the difference between the exchange value and the loan balance
To get rid of the negative equity of your loan, you can pay it back right away. For example, if you owe $ 12,000 for a car and the seller offers $ 10,000 in exchange, you can make up the difference of $ 2,000 from your lender. Again, make sure there is no prepayment penalty included in your loan terms.
Roll a negative capital value on a new car loan
If you do n’t have enough cash in your bank to repay your negative assets, then the car dealer will sometimes allow you to include the negative assets in the new car loan. Suppose your car loan owes $ 15,000, but your dealer only offers a discounted transaction of $ 13,000. The difference of USD 2,000 will be included in your new car loan. This is convenient because it does not require you to pay off your negative assets at your own expense.
But following this route usually means borrowing more for your next loan than a new car is worth – putting you at greater risk of turning back from that loan. A larger loan amount also means you can pay more interest. Make sure you are not obliged to make payments for both loans and that you are sure of all the conditions of the new loan.
Another tip: According to the Federal Trade Commission, some dealers may promise to pay off your existing car loan at a discount, but will only transfer your balance to your new car loan or from your prepayment deduction. Doing so will increase your loan cost. Before signing, be sure to read your sales contract carefully.
If your only option is a rollover, consider buying a used car that is one or two years old instead of the new version. A used car will have a lower value due to depreciation, which means you probably won’t need to borrow as much.
Trade-in option: sell your car privately
Remember that replacing a car in the salon is not your only option. You may also be able to sell your vehicle to a private buyer. First, contact your lender to make sure that this is an option based on your loan terms and what additional steps you need to take to make a sale.
Remember, buying and selling cars at dealers is not the only option. You can also sell your car to private buyers. Check with your lender first to ensure that this is an option based on your loan terms and whether additional steps (if any) are required to sell.
The disadvantage of selling to private parties is that it may require more leg work and time than the dealer trade-in. Usually, this involves collecting documents such as your title and maintaining records, publishing advertisements for cars, reviewing potential buyers, and conducting test drives.