How to Trade In a Car With Negative Equity

Trading in a car when you owe more than it’s worth can leave you feeling stuck. You may be ready for something new or want to downsize to a more affordable model, but your current loan is holding you back.

The good news is you still have options. Learning how to trade in a car with negative equity can help you make a smarter financial decision and avoid digging a deeper hole for yourself.

This guide breaks down what negative equity is and how it affects trade-in value. You’ll also learn the best strategies to move forward without hurting your finances long-term.

What is negative equity on a car?

Equity refers to how much value your vehicle has minus what you owe on it. Negative equity means you owe more than the fair market value of the vehicle. Having negative equity is sometimes referred to as being “upside down” on a loan.

Let’s say you owe $25,000 on your vehicle, but it’s only worth $20,000. In this case, you would have $5,000 in negative equity.

You may have negative equity in your car if:

• You made a small (or no) down payment
• You chose a long loan term (like 72–84 months)
• Your car depreciated quickly
• You rolled over debt from a previous loan

There are no shortcuts to getting rid of negative equity — you’ll have to deal with it one way or another. That could mean trading in the vehicle and rolling over the negative equity, or paying off the difference outright. 

How to trade in a car with negative equity

If you’re trying to figure out how to trade in a car with negative equity, start by exploring one of the following strategies: 

Pay down the difference up front

The simplest way to get rid of negative equity is to pay off the difference when trading in your vehicle. For example, if you have $3,000 in negative equity, you would put $3,000 down to offset the difference. 

However, it’s important to consider what your new loan will look like. If you only put down enough to cover the negative equity and are taking on a long loan term, you could end up upside down all over again. If possible, save enough to put a few thousand dollars down toward the cost of the new vehicle in addition to the negative equity. 

Roll the negative equity into your new loan

Most vehicle lenders will allow you to finance up to 125% of the vehicle’s value, which is known as 125% loan-to-value (LTV). This financial practice is intended to help borrowers roll in negative equity or finance add-ons, such as extended warranties. 

Let’s say you find a vehicle that’s valued at $25,000. If your lender uses 125% LTV limits, you could finance up to $31,250, which would allow you to cover just over $6,000 of negative equity with the new loan (minus any other fees).  

Here’s where rolling negative equity into your vehicle gets tricky. Sometimes, consumers will have to purchase a more expensive vehicle than they otherwise would have to leave enough room in the loan for the negative equity. Additionally, taking on a 125% LTV loan means you’re instantly upside down on your vehicle.

Wait until you have positive equity

If you don’t need to trade in your vehicle immediately and don’t want to continue the negative equity cycle, wait until you reach a break-even point on your current loan. Continue making the minimum payments until you’re no longer upside down. If you want to get in the green sooner, pay a little extra toward your vehicle loan each month. 

Putting up as little as 10% extra could have a big impact on your total loan balance and the amount of equity you have. Make sure to take good care of your vehicle, as well, as the valuation is also based on its condition.

Eventually, you’ll reach a break-even point and can begin building positive equity. 

How negative equity affects your trade-in value

Negative equity doesn’t change what your car is worth, but it does impact how much you benefit from trading it in. Dealers determine the value of a vehicle based on:

• Market demand
• Condition
• Mileage
• Comparable sales
• Make, model, and trim

If the amount you owe on the vehicle exceeds its value, the difference will show up on the balance sheet. Watch out for promotions advertising that the dealer will pay off your trade regardless of how much you owe. Some may inflate the price of the new car to mask rolled-in debt.

Always ask for a clear breakdown of:

• Trade-in value
• Loan payoff amount
• Any rolled-over balance

A reputable dealer will be transparent with you so you know what terms you’re agreeing to and how much you’re getting for your trade. 

Pros and cons of trading in a car with negative equity 

Some of the advantages of trading in a car with negative equity include:

• You can get a safer or more reliable vehicle
• You may lower your monthly costs by downsizing
• You can get rid of a high-maintenance vehicle 

However, there are also potential downsides. For instance:

• You may increase your total debt
• Your monthly payments could go up
• You’ll likely pay more in interest over time
• You risk staying upside down longer

Trading in your vehicle with negative equity can get you out of that particular loan, but it won’t erase your debt. You’ll have to pay it off eventually, even if it’s a part of a new loan.

How to avoid negative equity on your next car loan

Here’s how to stay ahead on your next car loan:

• Make a larger down payment
• Choose a shorter loan term
• Buy a model that holds its value
• Avoid rolling debt into new loans

If you’re taking on a new loan with negative equity, focus on reaching your break-even point by paying extra toward the vehicle. Over time, you’ll eventually get back in the black.

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