If you are considering trading a car with negative equity, you are likely strapped for cash and may find yourself stuck in a difficult situation. Negative equity occurs when the car loan balance is higher than the current market value of the car being financed. It is important to understand the financial implications of trading a car with negative equity and to learn how to do it in an effective and financially responsible manner.
Understanding the Negative Equity Situation
Negative equity arises when the amount of debt remaining on the car loan is more than the current market value of the car. This could occur when a large loan was taken out to buy a car that has since depreciated significantly in value. It could also occur when trading in a car with negative equity is combined with taking out a loan to finance a new car purchase.
It is generally ill-advised to carry over negative equity from one car loan to another because it can result in a lower credit score and an increased risk of defaulting on the loan. Additionally, the added debt resulting from a combined loan and negative equity may result in a more expensive monthly payment and higher interest rates on the combined loan.
Calculating Negative Equity
To understand the extent of your negative equity situation, it’s important to calculate the amount of negative equity in the car being traded in. This can generally be calculated by subtracting the car loan’s current balance from the car’s current market value. These figures can be obtained from the loan documents or from a credit report, as well as from online sources such as the Kelley Blue Book website.
If the loan balance is greater than the current market value of the car, negative equity may be present and this amount will need to be accounted for when negotiating the sale or trade-in of the vehicle.
How to Trade a Car with Negative Equity
There are a few ways to trade a car with negative equity. It is generally best to pursue the most financially beneficial approach to trading a car with negative equity, which may depend on individual circumstances.
Pay the Difference in Cash
One way to deal with a car with negative equity is to pay the difference in cash. The seller of the new car will typically require the net negative equity in cash or certified funds. Calculate the difference between the existing car loan balance and the current market value of the car. If the car owner has sufficient cash available to pay the difference, this can be a straightforward way to handle the transaction.
Roll the Negative Equity into the New Loan
It is also possible to roll the negative equity into the loan and combine it with the purchase price of the new car. Depending on the loan terms and the lender, this may result in higher monthly payments and higher interest rates on the loan. This approach may also damage the individual’s credit score, so it’s important to plan accordingly and only pursue this strategy if absolutely necessary.
Negotiate a Lower Purchase Price
Another option is to negotiate a lower purchase price for the new car to compensate for the negative equity in the car being traded-in. This requires careful negotiation to ensure that the price reduction offsets the negative equity and does not result in overpaying for the new car. Before initiating any negotiations, it is important to research the current market value of the car to ensure a fair deal is reached.
Sell the Car as a Private Seller
The final option for trading a car with negative equity is to sell the car as a private seller. This eliminates the need to pay the difference in cash or combine the loan with a new car purchase, and provides an opportunity to sell the car for a price that is closer to its current market value. With a private sale, the individual can keep the entire purchase price of the car, minus the cost of any associated advertising, such as listing the car on an online car market.
Trading a car with negative equity can be a tricky situation and it’s important to understand the financial implications. The approach taken to trading a car with negative equity should depend on the individual circumstances and can involve paying the difference in cash, rolling the negative equity into the new loan, negotiating a lower purchase price, or selling the car as a private seller. Careful consideration should be given to each of these options to ensure that the most financially responsible approach is taken.
