Negative equity is one of the toughest challenges to overcome when buying a new car. However, if you know what you are doing, there are a few different ways to overcome negative equity on your trade-in.
Your Credit Score Matters
The higher your credit rating, the more negative equity you will be able to roll over onto your new auto loan. If you do not have a good credit rating, there is a good chance that you will not be able to roll over much/any negative equity onto your new car loan.
Cash Down Payment is KING
If you owe $20,000 on a car that has a REAL trade-in value of $15,000, that $5,000 negative equity will need to be dealt with, one way or another. If you put $5,000 cash down, your NET down payment is $0. If you put $10,000 down, your net down payment is $5,000. In short, the more money you put down, the easier it is to trade out of your negative equity.
Money that the new car factory is willing to give you in the form of rebates can count towards your down payment. The one catch here is that new cars are usually more money, so:
Your Car Payment Will Probably Increase
There are 2 factors at play here. If you buy brand new, you will probably be spending more money than if you bought used. Also, to trade out of negative equity (without putting a lot of cash down) you have to buy an expensive vehicle so that your Loan-to-Value ratio is inline.
How Loan-to-Value Ratios Work with Car Loans
One other option: Don’t Trade Your Car In
Everyone knows that you can get more money selling your car on CraigsList than you can trading it in to a dealer. If your credit will allow you to buy a car without trading in, perhaps it is in your best interest to buy your new car, then sell your old car yourself to get the most money for it. Selling your car for what you owe on it is a much better option than rolling over $3,000 negative equity. There is, of course, a downside. If you do not sell your other car, you will have two car payments.