Should You Use a Negative Equity Car Loan?

How to Trade in a Car With Negative Equity

What are Negative Equity Car Loans?

A negative equity auto loan occurs when your loan exceeds the car’s total value.

A car buyer with such a loan ends up overpaying for a car and has a loss after selling it.

How does a buyer end up here? People who run into serious financial difficulties who’ve usually taken out no money down car loans.

Why? It’s because these loans come with higher interest rates which make the debt higher then the value of the car after a serious catastrophe like a car accident or a mechanical breakdown.

An underwater car loan is bad for your finances because cars don’t appreciate in value.

This situation brings about frustration and leads to a consumer feeling less attached to their cars which means they are more susceptible to repossession of their vehicle.

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How to Trade in a Car with Negative Equity

The good news is that you’ll find car dealerships and credit lenders willing to provide financing despite your situation.

How does this work? A local car dealership can negotiate with you by selling your old car and putting you into a new car by using:

  • A Rollover Loan – This is where your old balance is passed on to your next car allowing you to get a reliable vehicle while still paying back the lender.
  • A higher interest rate on your new loan – You agree to a higher interest loan on your next vehicle while they sell your current one to mitigate their risk while you get a reliable car.

Is this the best move?

At best, your new repayment plan will consist of two different auto loans and that makes it expensive until your old car is sold.

Some creditors are pretty sneaky and will silently include your outstanding car loan balance to the principle of your new car without telling you. Here’s how that would look:

If you need financing for a car worth $18,000 but you had an outstanding balance of $3,000, a dishonest credit lender adjusts your principle to $21,000 without your knowledge.

Avoid all the guesswork on finding the right lender. Apply now with our network and get instant acceptance!

The Pros and Cons of Selling Your Car With a Negative Equity


  • Helps you to get out of debt fast because you clear the outstanding balance using money obtained by selling your car.
  • You get better offers for your car compared to trade-in deals.
  • It’s suitable where refinancing cannot lower your car monthly payments to your desired amount.


  • You still have to pay monthly installments during the period your car has not sold.
  • Desperation can force you to settle for a lower offer than your initial price. Imagine waiting for a willing buyer for three months and having to pay expensive car installments at the same time. You may decide to drop your car price or reach out to a previous customer who gave you a low ball offer.

(8 Tips) How to get Rid of a Car with Negative Equity

Borrow from a credit union

If you’re planning to weather the storm and still retain your beloved car, you can offset your negative equity car loan by turning it into a low-interest loan.

Credit unions offer emergency loans at lower interest rates and repayment periods. You can actually borrow several loans over the course of your repayment period. This helps you to choose a shorter repayment period to lower the interest charges you will pay your credit lender.

Sell items to raise cash

Do you need enough money to pay off your loan in one payment?

Perhaps you could sell some idle assets to raise a significant amount of money within a short period of time.

If you have a plot of land that you aren’t planning to develop in the near future, sell it to get out of debt.

Perhaps you have a large investment portfolio of company stocks and you really need the money fast.

Get in touch with your investment adviser to find out how you can sell some stocks and rebuild your portfolio fast.

The interest you gain on your stocks is nothing compared to the interest you have to pay creditors. Get rid of debt!

Use the snowball method by Dave Ramsey.

Reach out for financial help

Life can throw you curve balls when you least expect it. You might be facing financial challenges because clients keep postponing payments and you’ve depleted your savings. In this situation, it’s hard to borrow from a bank or credit union loan because there’s no proof of income.

Rather than suffer in silence you can avoid losing your car by reaching out to family and friends.

There’s no shame in borrowing money when you really need it to prevent car repossession. If they understand your problems, they won’t rush you to pay the debts until you get back on your feet.

Avoid borrowing high-interest loans during the repayment period

You need to retain a huge portion of your net income in order to make car payments consistently.

One way of doing this is by avoiding debts with high interest rates. You don’t want to fall behind on an overpriced auto loan because you have other costly debts to keep up with.

During your repayment period, get a debit card to avoid interest charges that come with credit card expenses. You’ll reduce your monthly expenses by at least 25-30% and have enough money to either increase your monthly car payment or save for a lump sum. Avoid borrowing payday loans because the high APR and very short repayment periods will strain your monthly income.

Postpone less urgent events

Defaulting on your car loan attracts several unwanted consequences.

It ruins your credit score and that makes it hard to get affordable interest rates on future car loans.

A stained credit history also discourages potential credit lenders from approving your loan applications.

Last but not least, car repossession is a humiliating experience.

If you don’t want to experience these consequences, you’ll have to use your annual vacation’s savings to clear your upside down car loan. After getting out of debt, you’ll have enough net income to restore your vacation’s savings and even increase the amount you set aside every month.

Consider debt consolidation

You can get the right financial assistance from a debt consolidation company if you feel strained paying several debts every month. Though unpopular, this method will help you retain your car and reduce your monthly installments.

Tip: Second Chance Car Loans

Debt consolidation is where an attorney or certified credit officer structures all your recurring debt payments into one installment.

He or she negotiates with your creditors for new repayment terms to help you get lower installments than the initial arrangements.

You’ll pay more in interest charges because increasing your repayment period means spreading the interest rate over a longer duration.

Debt settlement

Car buyers who have too many liabilities resort to this method to avoid bankruptcy.

Debt settlement is where an attorney or credit officer meets your creditors to convince them to write off your outstanding debts for lower amounts. Doing this affects the payment history of your underwater car loan.

Tip: Getting Bankruptcy Car Loans

In order to apply for debt settlement, your outstanding balance should meet a minimum amount. This amount ranges from $10,000-$15,000 depending on where you reside. Debt settlement can lower your outstanding car loan balance by up to 30%. However, your credit score takes a huge dip due to incomplete payments, which may be too much of a burden for some people.

Voluntary surrender

Just like debt settlement, a voluntary surrender should be your last resort. It affects your credit score and chances of getting car loans in future. It’s also very costly because you walk away with nothing.

A voluntary surrender is whereby a car buyer returns his or her car to the credit lender due to inability to make payments consistently. People do this to avoid car repossession. However, a voluntary surrender remains visible on a credit report for seven years.

Tips If You Buy a New Car and Sell Your Old One

Check the value of the car before buying

Buying an overpriced car fixes you into a bad financial position from the start because your car starts to depreciate as soon as you drive it home. You’ll also run into issues with your auto insurance companies when filing for compensation.

Before signing any papers, check the value on Kelleys Blue Book. This free website provides an accurate valuation based on current prices in the U.S market.

During the weekend, you can also visit several local car dealerships to check the prices of the car you want. Gathering first-hand information which enables you to know the true value.

Pay a huge deposit

Why should you prepare a hefty down payment? Because it helps you to gain major equity so that depreciation doesn’t affect your car loan. For example, you want a car worth $30,000 and the creditor is willing to offer you a car loan worth $20,000. If you pay a deposit of $15,000, your outstanding balance is $15,000.

Tip: Car Loans for Low Income Earners and Bad Credit

New cars depreciate by 20% in value in the first year. So, you expect your car’s value to drop to $24,000. However, since you paid $15,000 instead of $10,000, your creditor determines your payments using $15,000 as the principal amount. How did we arrive at $15,000? Because it’s the difference between the car’s price ($30,000) and your down payment of $15,000.

Reducing the loan principal to $15,000 enables you to have a gap of $9,000 between the car’s value after one year and the principle. If you choose a 24-month repayment period, you’ll avoid getting into a negative equity auto loan.

Sell your current car instead of rolling it over to a new car

You’ll get more money selling it private party then going through the dealer.

Get a co-buyer

Are you finding it hard to raise a large cash deposit for your car purchase? You might need help by getting a willing co-buyer. He or she contributes a portion of your car payments as well as insurance. Co-buyers are important when applying for bad credit car loans because combined financial effort helps you to lower costly installments.

A co-buyer needs to have a good credit score, stable source of income and permanent physical address.

Negative Equity Car Loan FAQ’s

Should I buy a new or used car?

A new car comes in excellent condition and this gives you value for money. You won’t need to do any repairs or replacements using your own money because new cars come with auto manufacturers’ warranties. You can drive the car for a longer duration compared to a used one.

Tip: First Time Car Buyer Program

While buying a new car seems appealing, you also need to look at the downside. New cars rapidly depreciate after the first three years of release. The auto loan can turn negative if the car buyer paid a minimal deposit then chose a very long repayment period. Another setback is car dealerships charge costly GAP insurance for new cars. The Guaranteed Auto Protection Insurance lowers the effect of default because it’s the gap between your car’s real value and the outstanding auto loan balance.

Is it better to buy a used car then? Yes, it is because used cars have lower rates of depreciation. That means you pay affordable GAP insurance monthly payments. Since used cars are more affordable, you’ll be able to reduce monthly payments by paying a high down payment.

Can I refinance a negative equity car loan?

Applying for refinancing is one of the best ways of getting out of a negative car loan. If you choose to continue paying your current auto loan, refinancing enables you to lower car monthly payments. Your creditor provides a new interest rate and allows you to choose longer repayment periods.

If the difference between your auto loan and car’s value is just a couple of thousand, consider applying for refinancing. You’ll reduce the auto loan to where it’s almost equal to your car’s value. Are you planning to use your car for a long time? Refinancing your car loan will lower your installments so that you can retain your vehicle for a longer period.

Before refinancing, ensure you repay at least half of your current auto loan. Doing this helps you to get affordable car payments by lowering the principle of your new debt. Choose a short repayment period to help you build up equity faster than the car’s rate of depreciation.

Can I sell a car that has negative equity?

You can sell your motor vehicle if you need another car or want to get out of an underwater auto loan. The law allows you to sell to car dealerships or private buyers, depending on which is best for you. There’s a difference between doing a trade-in and selling a car to a dealership. In this case, car dealerships use a negative equity car loan calculator to determine their offer. Selling doesn’t grant you financing for your next car purchase.

Tip: Car Dealer in House Financing

Does this mean that your new seller takes over your outstanding balance? No. Selling your car only transfers ownership of the asset. You still retain the responsibility of clearing your negative equity car loan.

Get a Car Loan Today!

Complete Auto Loans has a team of highly experienced auto loan experts who are willing to offer you personal help in dealing with a negative equity car loan.

Apply online today and get instant acceptance.

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