Some car dealers advertise that, when you trade in your car to buy another one, they’ll pay off the balance of your loan. No matter how much you owe. But what if you owe more than the car is worth? That’s called “negative equity,” and the dealer’s promises to pay off your loan may be misleading. Learn how negative equity works and what you can do about it. Show
How Negative Equity Works With a Trade-InWith rare exceptions, cars decrease in value with age. Depending on other factors, like accidents, repairs, or other damage, the value of a car may decrease even faster. If you borrowed money to buy a car, you might owe more on your car loan than its current value. When that happens, you have negative equity in the car. Some car dealers say you won’t be responsible for the remaining balance on your old car loan when you trade in your old car. But that might not be true. Dealers sometimes just roll over the negative equity into your new car loan, so you still end up paying it. Example Say you want to trade in your car for a newer model.
You have negative equity of $3,000. That must be paid if you want to trade in your vehicle. If the dealer promises to pay off the $3,000, it shouldn’t be included in your new loan. But some dealers
Either way, this increases your new loan amount and its monthly payments: not only would the $3,000 be added to the principal, but you’d also be financing it (along with the new car). Understanding how negative equity works in a vehicle trade-in can help you make a better informed decision about buying and financing a car. It also helps you recognize if claims in car ads that promise to pay off your loan are misleading. How to tell if your negative equity is part of your new car loanBefore you sign a financing contract, the dealer must give you certain disclosures about the cost of that credit. Read them. Look for details about the down payment and the amount financed on the installment contract. Make sure you understand how your negative equity is being treated before you sign the contract. Otherwise, you may wind up paying a lot more than you expect. Look for a section on your contract with this information: Down Payment A. Gross Trade-In Value B. Less Prior Credit or Payoff by Seller C. Net Trade-In (A less B) (indicated if a negative number) D. Deferred Down Payment E. Manufacturer’s Rebate F. Other: _______________________________________ G. Cash Total Down Payment (C through G) Dealing with Negative EquityHere are some steps to take if you think you might have negative equity in a car you’d like to trade in: The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. SHARE:
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Prev Next Bounce/Getty Images 4 min read Published October 28, 2022 Written by Holly D. Johnson Written by Holly D. JohnsonArrow RightAuthor, Award-Winning Writer Holly Johnson writes expert content on personal finance, credit cards, loyalty and insurance topics. In addition to writing for Bankrate and CreditCards.com, Johnson does ongoing work for clients that include CNN, Forbes Advisor, LendingTree, Time Magazine and more.
Holly D. Johnson Edited by Rhys Subitch Edited by Rhys SubitchArrow RightAuto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing clear, well-researched information that breaks down otherwise complex topics into manageable bites. |