Purchasing A Car With Negative Equity: What You Should Know

Posted on: 23 January 2019

When you purchase a vehicle, if you opt for a lengthy loan or make a small or no down payment, it's possible to owe more on the vehicle than it is worth. This is known as being "upside down" on the loan; the amount of the loan that exceeds the car's value is known as negative equity.

For example, if you owe $8,000 on a car but the car is worth $5,000, this means that you have $3,000 of negative equity. It's possible that you might need to replace a vehicle with negative equity. Check out this important info for purchasing a vehicle when you're upside down on your existing auto loan.

It's Possible to Roll the Negative Equity into Your New Loan

The easiest way to buy a different vehicle when you have negative equity in your existing vehicle is to roll the equity into your new loan. For example, assume that the new vehicle you want to buy is $15,000 and you have $3,000 of negative equity in your old car. You could take out a loan for $18,000 to finance the cost of the new vehicle and take care of the negative equity.

Even though rolling over your negative equity into a new loan is the easiest solution, it may not be the best option for your finances. Rolling over your negative equity can raise the interest rate of your loan because funding a loan that exceeds the value of your vehicle is riskier for the lender. This also causes you to be significantly upside down in your loan for your new vehicle and yields a higher monthly payment.

You Can Pay Off Your Negative Equity with Other Loan Products

A vehicle loan isn't the only option for paying off your negative equity. You can also take out a personal loan, line of credit, or credit card to eliminate your negative equity. One of the advantages to this method is that it keeps your new auto loan as affordable as possible.

However, if you have challenged credit, you may have issues qualifying for an unsecured loan. An unsecured loan is a product that isn't secured by collateral. Since these loans are riskier for your lender, the lender may require a strong credit history and specific credit score. 

Selling Your Car Yourself Can Help Reduce Your Negative Equity

When buying a new car, it's tempting to just trade in your old vehicle. It's convenient to trade your vehicle in, but you typically receive a lower price.

Instead, sell your vehicle yourself to maximize its selling price and minimize your negative equity. You can use your cash savings or a personal loan to cover the negative equity so that the title can be changed to the new buyer.

For more information, talk to an auto loan lender today.


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