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Buying a Car When You Have an Upside-Down Loan

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 that’s worth less than the loan.

There are still some ways to buy a car when you have an upside-down loan, though they’re not too appealing.

The first thing to do is know how much your car is worth. If you owe $20,000 on a car that’s now valued at $15,000, you have $5,000 in negative equity. You’re upside-down on the loan.

You can find the current value of your car at a site such as Kelley Blue Book, and can ask a dealer to give you an estimate.

If a dealer gives you $15,000 on a trade-in, you’ll have to come up with the $5,000 difference to pay off the old loan.

Some car dealerships may say they’ll pay off your old car loan, even if it has negative equity. Be wary of such a promise, the Federal Trade Commission warns. The negative equity may be quietly rolled into your new car loan. Check the loan documents to make sure that the $5,000 in the example above isn’t added to the new loan or deducted from your down payment.

Other options for dealing with an upside-down car loan are:

  • Postponing your purchase until the old loan has positive equity by making extra principal-only payments.
  • Sell your car yourself to get more money for it.
  • Keep 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.
  • Look 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 if you’ll want to keep your car for that long. If not, you may want to look for a less expensive car.

Hope you enjoyed this tip. Contact us today for all your real estate questions!