How To Trade-In Your Car With Negative Equity
Is your car loan worth more than the vehicle's overall value? If so, you are currently dealing with what financial experts call ‘negative equity’. In this state, selling your car abruptly would be financially damaging. Hence, it is absolutely crucial for you to take your next steps carefully and explore the most suitable options for resolving your situation.
First Step: Calculating Negative Equity
Before you take any other steps, the first thing you should definitely do is to calculate the amount of negative equity you're dealing with. For instance, if the market value of your vehicle is $17,000 and you owe a total of $20,000 on the loan, this means you have $3,000 in negative equity.
You can discover the resale value of your car by checking on websites like Kelley Blue Book or Edmunds. However, to calculate it, you will have to input a few details about your vehicle, such as its model, manufacturing year, and the mileage it has recorded until now. You can find the latter in the odometer of your car. Alternatively, you can also contact your car lender to learn more about negative equity.
If you’re dealing with negative equity, then you will have two options in your hand - (a) you can either wait for a few months before trading-in your car, or (b) you can try to compensate for the negative equity. If your wages do allow, then you can opt for the second option. However, financially, the first alternative is definitely a lot better.
Wait With The Trade-In
If you’re yet to encounter any problematic issue with your car, then it would be better for you to postpone the trade-in, at least temporarily. You can hold it up until you have saved enough money to completely pay off the remaining amount. Bear in mind, this is only a good option when your car is in good condition. Otherwise, you will have to purchase a new one to replace it.
However, if you want to eliminate this situation quickly, then you can also pay a little bit extra on the monthly loan amount. If you are financially stable, then you can keep doing the same until you have no negative equity at all.
Before you opt for this alternative, make sure to determine that extra loan payments do not face prepayment penalties. Otherwise, you will have to pay an additional charge for early repayments outside the loan terms agreed to with the lender.
Get Rid Of Negative Equity
If you are thinking about buying a new vehicle, it will be better for you to pay off the negative equity. It is a good idea to first speak with the lender. Try explaining your current situation and inquire about additional options that they can provide to manage the underwater loan.
There are two different ways to do it:
- Roll The Negative Equity - If you’re thinking about buying a new car, then you can also roll down the negative equity of your older loan into the newer one. If you do opt for this option, then you wouldn’t have to pay any extra money from your pocket. However, with this alternative, your upcoming car loan will be greater than your current one. So, in that case, you might fall into the negative equity trap again.
- Pay-Off Everything At Once - The best way to get rid of the negative equity from your life is to pay off everything all at once. However, before that, you should always make sure to read the terms of your contract as well as ask your lender about any prepayment penalties that might arise.
When selling their car, most people tend to go to their dealership and talk with them. However, that is actually not your only option. You can also opt for a private buyer as well. Still, make sure to talk with your lender first about it for confirmation.
Selling a car privately has its own benefits. For starters, you will earn more money from a private buyer than an official dealer. A dealer would basically offer you the wholesale price of the vehicle. On the other hand, you can negotiate with the private buyer and trade your car at a better rate. This, in turn, can improve your finances and ability to pay off your car loan almost instantaneously.
In the end, it all depends on your choice and financial stability. If you have a substantial bank balance available then you can always pay off the loan all at once. Conversely, you can also postpone the trade-in and wait for the right time to sell it off to a private buyer.