How To Buy A Car With Negative Equity – If you have a car loan and owe more than what your car is currently worth, that’s negative equity. It can make trading in your car financially difficult. When deciding how to proceed with the transaction, it’s important to carefully consider your options — such as continuing to make loan payments to get positive equity in the car or transferring your negative equity to a new auto loan. Some routes may cost you more than others.
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How To Buy A Car With Negative Equity
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What Is A Negative Equity On A Vehicle And How Does That Impact Car Buying Process.
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When you consider that a new car can lose 20% or more of its value in the first year, it’s easy to see how you could end up owing more than your car is worth.
If the amount you owe on your car loan is more than the value of your vehicle, you have known negative equity. This is also known as reverse car loan.
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When trading in a car with negative equity, you have several options – but they can be expensive, and some require a lot of money out of your pocket.
Let’s take a look at how you can find out how much your car is worth and whether you have negative equity along with your potential trade-in options.
If you are absolutely certain that you have reversed your car loan and are considering trading in your vehicle, it is important to calculate an estimate of how much negative equity you have. You should know some key information:
Third-party auto websites, such as Kelley Blue Book and Edmunds, offer tools to help you estimate your car’s trade-in value. You just need to enter details including the year, make and model of your car and the number of miles on its odometer.
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Contacting your lender is an easy way to find out how much you owe on your car loan. You can usually check your repayment amount by phone or by logging into your account on your lender’s website. Your loan repayment amount can be different from your current loan balance because it includes any interest you owe during the payday, in addition to unpaid fees.
If the amount you owe on your car loan is more than the appraised value of your vehicle, the difference between the two is negative equity. For example, if you owe $9,000 on your car loan and your vehicle has an appraised value of $6,000, you currently have $3,000 in negative equity.
When trading in a car that has negative equity, you have two main options: delay your trade until you can reverse your loan, or move forward with the trade and pay off the negative equity.
Postponing your deal is generally a better option financially. But this only works if you can wait to get a new car. You can put your deal on hold until you save enough to pay off your loan, or—in the short term—you can pay off the extra loan until you’re no longer upside down.
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Paying additional principal-only loans or paying more than the monthly minimum can help you pay off your loan faster and reduce your negative equity. But before you do, make sure your loan terms don’t include prepayment penalties. This is a fee that some lenders charge borrowers who pay off their loan earlier than expected.
If you need a new car sooner, you need to pay off the negative equity one way or another. There are several ways to do this.
To get rid of negative equity on your car loan, you can pay it off all at once and out of pocket. For example, if you owe $12,000 on your vehicle and the dealer offers a $10,000 trade-in, you’ll reimburse your lender the $2,000 difference. Again, make sure a prepayment penalty isn’t included in your loan terms.
If you don’t have enough cash in the bank to pay off your negative equity, a car dealer will sometimes let you roll your negative equity into your new car loan. Let’s say you owe $15,000 on your car loan, but your dealer only offers $13,000 for your trade-in. The $2,000 difference is applied to your new car loan. This can be convenient because it doesn’t require you to pay your negative equity out of pocket.
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But going this route usually means borrowing more than your new car is worth on the next loan—putting you at greater risk of going upside down on that loan. A higher loan amount means you can pay more interest. Make sure you don’t have to make payments on both loans and that you understand all the terms of the new loan.
Another tip: According to the Federal Trade Commission, some dealers may promise to pay off your current car loan as part of the deal, but actually just add your balance to your new car loan or prepay it. You deduct. . Doing both can increase your loan costs. Be sure to check your sales contract carefully before signing.
If flipping is your only option, get a used car that’s a year or two old instead of new. A used car will be worth less due to depreciation, meaning you probably won’t need to take out a loan.
Keep in mind that trading your car in at a dealership isn’t your only option. You can also sell your car to a private buyer. Check with your lender first to make sure this is an option based on the terms of your loan and what other steps, if any, need to be taken to complete the sale.
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This option comes with one big advantage: you’ll likely get more money if you sell privately versus trading your car in at a dealership. Sellers usually offer nothing more than wholesale value in a trade. With a personal buyer, you can usually sell the car for a higher price, which can help offset your negative equity.
The downside to selling to a private client is that it can take more work and time than a dealership. Often this includes collecting documents such as title and maintenance records, posting ads for the car, vetting potential buyers and offering test drives.
If you’re showing your car loan upside down, it’s a good idea to delay your deal if you can—unless you’re comfortable paying down your negative equity.
But if you need a new car soon and your only option is negative equity, consider buying a used car and borrowing as little as possible.
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And be sure to double check that the loan term and monthly payment amount fit your budget. As the loan term lengthens, the downside risk to the equity increases as the car continues to depreciate in value. You may also pay more interest at the end of the loan term. And no matter which option you consider, be sure to do your homework so you can choose the best solution for you.
About the Author: Warren Clark is an author whose work has been published by Edmunds.com and the New York Daily News. He enjoys providing readers with information that can make their lives happier and broader. Warren holds a Bac… Read more. New car sales have been booming since dealerships closed in mid-March. Initial estimates for new car sales for 2020 fell to 12.3 million, but have since been revised at least three times to the current estimate of 15.1 million. In a healthy economy, US consumers purchase 16.5 to 17 million new vehicles each year. That’s a big drop, but still not as bad as 2009’s sales
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