It's sometimes possible to trade in your car when you're upside down on your auto loan, but it might not be a wise choice – especially if you're struggling with bad credit. When you trade in a vehicle with negative equity, you're still responsible for paying off the original loan. If you don't have a way to do this, it may be better to wait until there's equity you can use.
What it Means to Be Upside Down in Your Car Loan
When you're upside down in your car loan, it means you owe more money on your vehicle than it's worth. In other words, you aren't able to get enough money out of a dealership trade in or a private sale to pay off the loan.
It's still possible to sell or trade in a car with negative equity, but in order to remove the lienholder from the title you have to pay the loan off – usually out of pocket. If you don't have the cash to pay off your loan, a lender may let you to roll the negative equity into your new loan on another vehicle.
Not all lenders allow this, and it's not the best thing to do if you're struggling financially. The remaining balance from your original loan (that wasn't covered by the sale of your car) gets added to your new loan, and you also end up paying more in interest charges on the new loan.
Getting Out of Negative Equity
Most people spend some time upside down in their auto loans because vehicles depreciate rapidly. New cars in particular begin losing value as soon as their tires hit the street, and typically lose around 20 percent of their total value in the first 12 months of ownership.
In order to gain some momentum in reducing negative equity an auto loan, there are a few things you can do:
- Make a large down payment – No one wants to hear a big figure tossed around when it comes to financing a vehicle, but making a significant down payment of at least 20 percent of the car's selling price is a great way to combat negative equity from the jump.
- Make extra payments – In order to pay down the balance on you loan more quickly, make extra payments whenever possible. Putting a few extra dollars into each payment can help, but if you can, try to make that extra payment sizeable.
- Keep your vehicle in good condition – Because cars in better shape are worth more, you should try to keep up with regular maintenance and keep your vehicle clean. This means taking care of it both inside and out at all times.
- Consider models that retain their value – When you purchase a car, it's also a wise idea to get one that keeps its value better than others, such as a Toyota, Honda, or Subaru.
Even if you can't take the extra steps to reduce negative equity sooner, eventually, your vehicle won't be underwater, because you won't have a loan balance forever. Depreciation also slows down after the first few years of ownership, and doesn't generally increase in intensity until around year five. Once there's equity in your car, or you pay off your loan, your vehicle’s value is yours to do with as you please.
The Bottom Line
Even though it's possible to get out of negative equity quicker, or trade in or sell your car when you're upside down, we don’t recommend this. Instead, you should wait until there's enough equity in your vehicle so that you can use it as a down payment on your next auto loan.
No matter your equity position, let us help if you need another car but don't know where to turn because of bad credit. The Car Connection works with a nationwide network of special finance dealers that have the lending resources needed to assist people with bad credit.
Our process is fast, free, and easy to start – just fill out our auto loan request form, and we'll get to work matching with you a local dealership. What are you waiting for? Get started right now!