Owing more on a car loan than the car is worth”called being upside down on a loan”can make buying a new vehicle difficult.
The negative equity can mean getting less for your old car at trade-in, or coming up with the extra money to pay off the old debt. Cars depreciate quickly, so the urge to switch to a new car after a few years can leave you with an older car thats worth less than the loan.
There are still ways to buy a car when you have an upside-down loan; however, theyre not too appealing.
First, you’ll need to know how much your car is worth. If you owe $20,000 on a car thats now valued at $15,000, you have $5,000 in negative equity, which means that you’re upside-down on the loan.
You can find the current value of your car at a site such as Kelley Blue Book, or even ask a dealer to give you an estimate.
If a dealer gives you $15,000 on a trade-in, youll have to come up with the $5,000 difference to pay off the old loan.
Some car dealerships may say theyll pay off your old car loan, even if it has negative equity. But the Federal Trade Commission warns consumers to be wary of such a promise, as the negative equity may be quietly rolled into your new car loan. Check the loan documents to make sure the $5,000 in the example above isnt added to the new loan or deducted from your down payment.
Other options for dealing with an upside-down car loan include:
- Postponing your purchase until the old loan has positive equity by making extra principal-only payments.
- Selling your car yourself to get more money for it.
- Keeping the length of your new car loan short. If negative equity is rolled into a new loan, a longer loan will take more time to reach positive equity.
- Looking for cash-back rebates and other incentives when shopping for a new car that could help cancel the negative equity.
Getting stuck in a cycle of upside-down loans because you want the newest and most modern car every few years can make your financial life difficult. Consider the long-term implications of taking out a new car loan for five years or longer, and whether or not youll want to keep your car that long. If not, you may want to look for a less expensive car.
Published with permission from RISMedia.
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