Trading in Your Car when You Owe More than it's Worth

If you’re in the market for a car and want to trade in your old vehicle, you should first check to see if you have equity in it. If that’s the case, great! Once it’s been appraised, you can apply all or some of it toward a down payment and make your next auto loan more affordable. If you have negative equity, or owe more than the car is worth, trading in your old vehicle can be a little more difficult.

What Does it Mean to Have an Upside Down Trade-in?

You can trade in a car with an outstanding auto loan, but it’s important to consider how much the vehicle is worth and how much you still owe. If the loan balance is more than your car’s appraised value, you have negative equity – which also means you’re underwater, or upside down. At some point, most car owners are underwater on their auto loan. It’s not necessarily a bad thing, but it can get in the way if you want to trade in your vehicle.


How to Trade in a Car that has Negative Equity

Trading in Your Car when You Owe More than it's WorthBefore you head to a dealership, you should calculate how much equity you might have in your trade-in. To do this, first request a payoff amount from your lender. Then, to get a rough idea, you can either research your car’s actual cash value (ACV) using valuation sites such as NADAguides, or, for a more accurate number, get an appraisal from a dealer.

Once you have the numbers, take the ACV and subtract it from your loan payoff amount. For example, if your loan payoff amount is $8,000 and your vehicle is appraised for $10,000, you have $2,000 in equity that can be used toward a down payment or taken as cash. If the numbers were flipped, and your car is appraised at $8,000 with a payoff amount of $10,000, you would have $2,000 in negative equity.

If you’re considering trading in your vehicle even though it has negative equity, you have three options to choose from:

  1. Pay the difference – If the difference isn’t much and you have the cash to cover the negative equity, you can pay the difference out of pocket.
  2. Roll over the loan balance – Not offered by all lenders, some may allow you to roll over the amount into the new car loan. Keep in mind that you aren’t getting rid of the negative equity when you roll it over – you’re actually adding the balance from the old loan to the new one.
  3. Wait it out – The best option may be to simply wait until your trade-in has equity or is paid off.

The Bottom Line

Even though some lenders allow you to roll over negative equity, you end up paying for two car loans at once – and if you don’t budget accordingly, this can come back to haunt you. Know how much car you can afford, and get an idea of the equity in your trade-in before you head to a dealership.

If you’re ready to trade in your vehicle for a new one, but worry your credit is in the way, let The Car Connection help. With our car loan request form and our nationwide network of dealers, we can connect you to a local dealership that can help you get the financing you need. Get started today!


Auto Insurance

Find insurance in your area.

Financing with The Car Connection

At The Car Connection, our goal is to remove the challenges of getting financed for a vehicle. Through technology, flexible financing options and exceptional customer service, we want to give you the power to control your car-buying experience.

  • All Credit Types
  • No Obligation
  • Easy and Secure
Get Started