Negative Vehicle Equity Explained


Vehicle equity is not one of the first things that many people think about when they are looking to sell their car. However, the equity of your vehicle can have a big impact on the payments for your new vehicle and whether it is a better idea to buy or lease. Here is an explanation of negative vehicle equity to help you when you are looking for a new vehicle.

What is Negative Equity?

The equity of a vehicle is the difference between the value of the vehicle and the remaining loan payoff. If the amount that you owe for the loan is higher than the value of the vehicle, you have negative equity on the vehicle. For example, if you owe $18,000 on your current auto loan and your vehicle is valued at $15,000, you have negative equity of $3,000.

How Does Negative Equity Affect Trade-Ins?

Understandably, the time that negative equity is most problematic is when you are in the market for a new vehicle. Even if you are trading your vehicle in at a dealership that promises to pay the remainder of your loan payment, negative equity can affect the deal in ways you may not expect.

Dealers do not want to pay anymore for a trade-in vehicle than it is worth. While many are happy to pay off your loan up to the value of your vehicle, a common tactic is for the dealer to roll the negative equity into your payments for the vehicle they sell you. Some dealers may instead request that you pay the negative equity as a down payment for your new vehicle.

It is important to understand exactly how the negative equity for your vehicle is being handled when you do a trade-in. Never take a dealer's advertisements at face value. Instead, read the contract thoroughly, discuss your vehicle's equity in detail with the dealer, and wait to sign until you fully understand and agree with the terms. This will save you from car payments that are higher than you expected.

Alternatives to Auto Loans

While trading in your old vehicle and taking out an auto loan for a new one is one of the most common methods of getting a new vehicle, it is definitely not your only option. If you have negative equity on your car, there are a few other methods you should try first that may yield lower monthly payments.

The most obvious option is to try to sell the car yourself above its wholesale value. If your negative equity amount is low, you may be able to sell your car for enough to cover both the value of the vehicle and the equity. This will allow you to pay the remainder of your loan and the down payment on your new vehicle with as little out-of-pocket expense as possible.

If selling the vehicle yourself is not an option, leasing a new vehicle instead of buying can result in significantly lower monthly payments, even with high negative equity. Factoring the residual value of the new vehicle into your lease often cuts your monthly payments in half compared to a new auto loan. The compromise, of course, is that you will have to buy the car at its residual value at the end of the lease if you want to keep it.

Buying or leasing a new car when you have negative equity on your current vehicle is not difficult if you know how to handle the equity. Keep these tips in mind so that you can get the new car you need at the best possible price. For more information on using your car for money, check out car equity loans professionals.


3 June 2015

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