Upside Down on Your Loan? What are Your Options?

When your car is worth less than the outstanding balance on your auto loan, you are “upside down” in the loan, a situation also know as negative equity. Negative equity in a vehicle creates a precarious financial situation, particularly when you try to use that vehicle as a trade-in. Although being upside down in your auto loan makes it much more difficult to buy a new car, it’s not impossible. Read on to learn what your options are when trading in a car with negative equity.

Finance the Negative Equity

The first option involves asking your creditor to issue a loan that covers both the price of your new vehicle and the negative equity of your trade-in. This option is also known as rolling one auto loan into another. Of all the options available for buyers upside down in their current car loans, this is the most expensive and least advisable. If you are qualified, you may find a lender that will issue you a large enough loan to cover your negative equity, but the interest rates will be outrageous. You will inevitably end up upside down in your new car loan almost immediately because your debt will significantly exceed the value of your new car.

Take Advantage of Cash Incentives

Cars are more strongly incentivized now than ever, and buyers with upside down trade-ins can use these cash incentives to cancel their negative equity. For instance, if you are $2,000 upside down in your current vehicle and wanted to trade it in for a car with a $3,000 rebate, you can erase your negative equity and still make a down payment of $1,000 on your new car. If you decide to take this route, make sure you research the vehicles that offer the largest incentives before you begin car shopping.

Be Patient

Once you catch the new-car fever, it can be hard to delay gratification for even a few days, let alone several months. However, if you find that none of the options we’ve discussed so far works for you, you might simply want to take a few months or even a year or two to pay down your current loan and get back into the black with your vehicle equity. Waiting to buy a new car will help you get your loan balance under control and put you in a much more favorable position to use your trade-in to your advantage.