You're ready to trade in your car, but what should you do if you owe the bank more than its value? Here you must decide whether you want to keep your vehicle or learn how to trade in a car with negative equity.
While things may not be as cut and dry, you can still trade your car in at a dealer; you just need to know how to best navigate the process.
What is negative equity?
A vehicle's equity is determined by subtracting the amount you owe on the car and its value. Having negative equity on a vehicle is not the best situation because you end up paying more than it is worth. However, this should not stop you from purchasing it.
When you trade in a car with negative equity, the equity will likely flow into yoursloans for new cars. Here's an example...
If your current car has negative equity of $10,000 and your new car costs $20,000, you would take out a $30,000 loan from the lender. $20,000 covers the cost of your new vehicle, while $10,000 covers negative equity on your trade-in.
Steps for trading in a car with negative equity
If you're ready to trade in your car with negative equity, here's the general process to keep in mind.
Calculate your equity
The first thing you want to do is calculate how much negative equity you have. To do this, first contact your lender for a payout offer. Then request the trade-in value for your vehicle. You can usually use a tool like Kelley Blue Book to find an estimated value.
Another option is to take your vehicle to a dealer to get the actual trade-in value. Once you have these two numbers, subtract the down payment quote from the car's value to determine the amount of negative equity.
(Trade-in Value) – (Payout Quote) = Vehicle Value
Once you determine your car's negative equity, this is the amount that will likely be transferred to your new car loan for your next car.
Calculate your financing
When you trade in a vehicle with negative equity, you will automatically have to pay more because your loan also includes the negative equity. To get an idea of how much your loan might be, you can use a car loan calculator that takes into account estimated factors such as APR, loan term, trade-in value, etc. Although the terms are estimates, it can help you get an idea find out how much you can expect to spend on your new car loan.
Request pre-approval
Request pre-approvalis a good idea whenbuy a car, regardless of whether your vehicle has negative equity or not. But especially since you have to finance more due to negative equity, you want to secure the best rates and terms to make your loan affordable.
To ensure you get the best rates, you should apply to at least three different lenders. After receiving responses from all lenders, compare their offers to choose the loan with the best terms.
As long as you complete all your applications within a short period of time, usually about 45 days, your applications will all count as one heavy hit so your credit won't be affected that much.
Find a dealer to trade in your vehicle
Once you have secured financing, you can find a dealer to trade in your car. Most dealers will accept your trade-in if it is in good condition. Just as you apply for pre-approval with multiple lenders, you should do the same when searching for trade-in values to find the best deal.
Additional tips for trading in a car with negative equity
In addition to completing the basic process for trading a negative equity vehicle mentioned above, there are other tips you can consider.
Improve your credit score
Ofhigher your credit score, the better terms you will qualify for with your car loan. So if you can take the time to improve your credit score before going through the pre-approval process, you'll likely get better terms on your loan. This may include doing things like reducing your debt, pulling your credit report and correcting inaccuracies, making sure all your accounts are not in default/collections, etc.
When estimating your financing, be sure to enter different APRs to see how a few percentage points can drastically change the amount of interest you pay on your loan. That is why it is crucial to take this step.
Consider a cheaper car
Because your costs will be higher if you trade in a vehicle with negative equity, consider purchasing a less expensive vehicle. This keeps your expenses lower and allows you to balance how much you owe on your new car and how much you need to pay to cover your trade-in.
Pay off the negative equity
While you may not be able to cover the full cost of your negative equity, any amount you can pay upfront will help offset how much you need to finance with your new loan. Many lenders allow you to make additional payments toward the principal of your loan. The less you finance, the better.
Learn more about how to trade in a car with negative equity
If you think trading in your car with negative equity is a good next step for you, make sure you learn more about the process from the lenders you're considering.
At Atlantic Financial Federal Credit Union, we help our members complete many of their auto loans, including negative trade loans.
See how we can help