Trading In a Car With Negative Equity?

When auto dealers claim In their advertising that they will pay off your current auto loan, no matter how much you owe, if you trade in your car for a new one, they are not entirely telling the truth. Actually they are not even in the same ballpark with the truth.

In reality, you are going to pay off every penny of your loan. And it doesn’t matter one iota whether you have equity in your vehicle or if you have “negative equity” in the vehicle. For example, if your car is worth $20,000 but you only owe $12,000, you only end up with $8,000 towards your new auto.

Trading In a Car With Negative Equity

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In the case of negative equity, if you owe $24,000 on the $20,000 vehicle, your old loan will be paid off but the extra $4,000 is rolled over into your new loan. In either case the dealership did not pay a penny towards the pay off of your old loan. True, you will no longer be responsible in any way for the old loan and the car dealer will process the paperwork for you, but the promise to pay off your loan for you is misleading at best. Your negative equity will add principle plus interest to the new loan thus increasing your monthly payment.

Having worked in dealerships myself, I can tell you from experience that to get the best deal on a “trade in”, don’t trade it in! Making the effort to sell it yourself can literally save you thousands of dollars. Don’t expect to get even the wholesale value for a trade in. Not even close in most cases. Dealers always take in trades “back of book”.

Of course federal law requires that before signing a contract to finance a car or truck, the dealer must disclose details about the cost of credit. Read them, especially the details concerning the down payment and the amount financed. Make sure you understand how your negative equity is impacting your payments. You need to know up front exactly what you are in for.

My personal opinion is that, if at all possible, bite the bullet and pay down your loan before trading in the vehicle. Rolling over negative equity is a bad habit. People get totally buried in their loans. A lady walked on the lot one day and asked me if we had any shovel cars? Turned out that she owed $18,000 more than we could give her on trade! We had no shovel cars for someone that buried.

In summary, to avoid negative equity nightmares just don’t do it. Pay down your auto loans. Sell your old vehicles yourself. Automobiles are a depreciating asset. They lose value over time as we use them up. Just because you may want a new vehicle doesn’t mean that it is a wise financial decision to get one.

If you are having a problem with an auto dealership concerning false or misleading advertising, sales issues or issues with a finance contract specifically, contact the Federal Trade Commission or your state attorney general.

 

Dealing with Negative Equity

In this video, Auto Credit Express discusses the differences between equity and negative equity during a auto trade-in. For more helpful tips and advice on b…

 

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Post By Georgia (29 Posts)

An Avid writer and researcher, Georgia has a decade of experience working with banks to arrange auto loans for people with both excellent or poor credit. She has a passion for personal finance issues

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