How to Trade in a Car with Negative Equity and Bad Credit

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Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.


, Contributing Writer - November 15, 2016

If the amount of money you owe on your car loan is more than the value of your vehicle, then you have negative equity in it. This is also known as being "upside down" or "underwater." And when you have bad credit, it can be difficult to trade in a car in which you have negative equity.

First, let's start with this: negative equity is quite common. In recent years, the average price of vehicles has gone up. At the same time, the average length of auto loans has also been on an uptick. These two factors combined with the simple fact that cars depreciate in value lead to a lot of people being upside down at some point. It's even more common in longer-term loans where little or no down payment is made.

Having negative equity really isn't that big of a deal unless you need to trade your car in. There are plenty of circumstances where you may need to get rid of your current car for another one sooner than expected. Perhaps your income situation has changed and you can no longer afford your current payments, your family got larger, or your current vehicle needs expensive repairs.

Whatever the case, you may find that you need to trade in a car which is worth less than the loan balance. And if you have bad credit, you may find that this is going to be more difficult than you originally thought.

Negative Equity and Bad Credit

Normally, a trade-in can be applied to a car purchase as part (or all) of your down payment. But when your trade-in has negative equity, it's the exact opposite. Instead of having a down payment, you are bringing debt to the table.

When you have bad credit, this can hurt your chances of getting approved for another auto loan. This is because the negative equity isn't going to just disappear. You either have to pay the difference out of pocket or roll it over into the new loan.

Subprime lenders are hesitant to lend a loan amount that is more than the value of the car you are trying to finance. When you add negative equity to the mix, you are asking them to do exactly that. This means that if you are trying to trade in a car with negative equity, you are actually hurting your approval chances.

How to Trade in a Car with Negative Equity and Bad Credit

When you have bad credit and need to trade in a car with negative equity, you basically have three courses of action available:

  • Cover the Negative Equity Yourself - The easiest way to eliminate it is to make up the difference between your trade-in's appraised value and your loan balance out of pocket.
  • Hold Off on Your Car Purchase - You could also postpone financing another car until you have eliminated the negative equity or even paid off your current loan. A good way to do this more quickly is paying more than the minimum amount on your current loan each month.
  • Roll the Negative Equity into a New Loan - This may be possible in some situations, such as when the amount of negative equity is minimal, but there's no guarantee the lender will allow you to do this.

The Dangers of Rolling over Negative Equity When You Have Bad Credit

If (and it's a big "if") the lender allows you to roll negative equity into the new loan, it's not necessarily a good idea to do so. This is because you will be financing the selling price of the new car plus the negative equity from your current loan.

Basically, you are paying off two loans at the same time. The negative equity is being factored in your monthly payment and you are also paying interest on it. This can be expensive due to the higher-than-average interest rates of bad credit car loans.

We recommend that consumers try to avoid trading in a car with negative equity unless they have no other choice.

If you are dealing with credit issues and are struggling to find a dealer that can help you out, it might be time to try CarsDirect. We are connected to a nationwide network of dealerships that specialize in working with people in unique credit situations. We can connect you to one in your area if you simply complete our free and easy online application.

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, Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.


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