When you trade your vehicle into a dealer and pay off the remaining balance, you’re off the hook financially. But you’re also left without a car. Although public transit and ridesharing are common alternatives, you might still want your own ride.
In that case, it’s not uncommon for people to trade in for a used car. You can roll your negative equity into a smaller loan with, ideally, a lower monthly payment. In turn, you’ll have more money to apply to your outstanding balance.
However, this approach is not a recommended solution because your new loan is immediately upside-down. You aren’t erasing the negative equity.
Keep in mind, by rolling your loan into a cheaper car, you’re also extending your loan’s term. The longer your loan term, the more time your next car has to depreciate while you still owe money. If you don’t proactively repay your new car loan ahead of schedule, you could dig yourself into a worse financial hole.
You also have the option of rolling your negative equity into a lease – rather than another loan. In case you’re unfamiliar, leasing a vehicle is akin to renting instead of owning a house. You don’t own a leased vehicle, you’re borrowing it for a set period of time. Leases remove the burden of resale once the lease matures.
Compared to rolling a loan into a new vehicle, the prie: lower monthly loan payments. However, you’re still responsible for the negative equity, which would be accounted for in the cost of the new lease.
Trading in with dealer incentives
Although it’s becoming less common, borrowers can also try to find vehicles with dealer incentives to reduce their negative equity. Sometimes, dealerships promote their inventory by offering significant discounts off sticker prices or cash rebates for a limited time. Dealerships are more likely to employ this tactic toward the end of the year before the next lineup of models launches.
If you’re able to find a good opportunity, you could trade in your upside-down vehicle for a discounted model. Since you’re getting a lower price on a car relative to its market value, your savings may offset some, or all, of your negative equity. You can use sites like Edmunds and Kelley Blue Book to estimate the market value of a car compared to a dealer’s discount.
Trading vs. Selling Your Upside-Down Car
You can also try to sell an upside-down car to a private party. While negative equity isn’t exactly a selling point, you might still be able to find interested car buyers.
In terms of convenience, it’s much easier to trade in your car to a dealership. They handle the paperwork for you – all you have to do is show up and agree on a value. However, that comes at a cost. Most of the time, the trade-in value of your car is less than what you could sell it for on the market. That’s because dealerships typically offer a price close to your vehicle’s wholesale value, which is lower than its retail value.
If you’re willing to take on the challenge of selling your vehicle privately, you could reasonably expect to get a better offer from an individual buyer. But the trade-offs are convenience and time.
You have to find prospective buyers, which can include: paying for advertisements, fielding phone calls or emails, and scheduling test drives. Plus, the added inconvenience of having to go through your lender since you’d still owe them money and they likely hold the title. But, if you have the time and previous experience selling vehicles, selling your car to a private party could be an effective way to minimize your negative equity.