Trading In a Car You Owe More On Than It’s Worth
Owing more on your car than it is worth is more common than most people think, and it can make a trade-in feel stuck. This guide explains what negative equity is, how to find out where you stand, and the options to consider before you shop. It is general information, not financial or legal advice.
What negative equity means
Negative equity, sometimes called being upside down or underwater, means you owe more on your car loan than the car is worth. Vehicles lose value as they age, and an accident or damage can lower it further. A long loan term or a small down payment can also keep the balance above the value for longer.
It is common. In its auto finance data for loans made from 2018 to 2022, the Consumer Financial Protection Bureau found that about 11.6% of vehicle loans included negative equity from a trade-in. The CFPB also found that borrowers who financed negative equity tended to have worse outcomes, though it notes the data show an association, not proven cause. You can read the CFPB report.
Find out where you stand
Before you shop, take three quick steps.
- Get your payoff amount. Ask your lender. It can be a little higher than your balance because it includes interest owed.
- Estimate your car’s value. Use a pricing guide like Kelley Blue Book or Edmunds. A real offer can differ, and the final number is negotiable.
- Subtract. Value minus payoff. A positive number is equity you can put toward your next vehicle. A negative number is negative equity.
Want to see how trade-in values are set? Read how dealerships determine your car’s trade-in value, or start with our online trade-in valuation.
Your options
If you have negative equity, you have to cover the gap somehow. Here are the common paths and what to know about each.
Pay the shortfall in cash when you trade. This keeps the gap out of your next loan.
If you do not need a vehicle right away, keep paying down the loan. Extra principal-only payments can help you reach positive equity sooner.
The shortfall is added to your next loan. You borrow more, pay interest on it and start out owing more than the new vehicle is worth. Consider this carefully.
A smaller loan can ease the strain. You hand over the trade-in and cover the gap, and a less expensive vehicle can keep the new loan lower.
A private sale may bring more than a trade-in offer, but it takes more time and effort. Ask your lender how payoff and title work if you still owe on the car.
What to check in the paperwork
The FTC advises reading the contract closely when you have negative equity, because what you are told and what is written can differ. Ask these questions and look for the answers on paper.
- How is my negative equity being handled, and where is that written in the contract?
- What is the down payment and the total amount financed?
- What does the monthly payment include? Ask about any add-ons, such as GAP coverage, what each one covers and when it applies.
- Is this the shortest loan term I can afford? A longer term takes longer to reach positive equity and costs more in interest.
- Was my old loan paid off? A few weeks after the deal, confirm your previous lender has the payoff and sent paperwork.
If you believe a dealer promised to pay off your loan and then added it to your financing, the FTC says to report it at ReportFraud.ftc.gov. You can read the FTC’s guidance on trade-ins and negative equity.
How Valley Hi can help
Our team can appraise your vehicle, explain what you owe and walk through the options above so you can decide what fits. We cannot promise a specific outcome, because it depends on your vehicle, your loan and lender approval. Start with the online trade-in valuation, and our finance team can go over your options in person.
The Same Commitment, Across All Four Brands
Whether you drive a Honda, Kia, Nissan or Toyota, or you are trading in a different brand, we explain each step and answer your questions. Take your time with the paperwork, and ask for anything in writing.
Common Questions
What is negative equity on a car?
Negative equity, also called being upside down or underwater, means you owe more on your car loan than the car is worth. Cars lose value as they age, and accidents or damage can lower the value further.
Can I trade in a car with negative equity?
Often yes, but you have to cover the gap between your loan payoff and the trade-in value. You can pay the difference in cash, or it may be added to your next loan, which raises the amount you borrow and the interest you pay.
Is rolling negative equity into a new loan a good idea?
Usually it is not the best option. The amount you owe starts out higher than the new vehicle is worth, and you pay interest on the shortfall. If you do it, ask where it is written in the contract, check the total amount financed and look for the shortest loan term you can afford.
How do I find out if I am upside down on my car loan?
Ask your lender for your payoff amount, which can be a little higher than your balance because of interest owed. Estimate your car’s value with a tool like Kelley Blue Book or Edmunds, then subtract the payoff from the value. A negative number means negative equity.
Should I wait to trade in if I have negative equity?
If you do not need a vehicle right away, waiting can help. Extra principal-only payments on your loan can bring you closer to positive equity. If you need a different vehicle now, ask about your options before deciding.
Not sure where you stand?
Start with your trade-in value, then talk with our team about your options.
This guide is general information and not financial or legal advice. Trade-in values, payoff amounts, loan terms and approval vary by vehicle, lender and customer. See dealer for details.
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