Negative Equity Defined

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Senior Automotive Editor

Christian Gulliksen is the Senior Automotive Editor for CarsDirect. He was formerly a senior editor with Robb Report magazine, and has contributed to publications like Worth, Variety, The Hollywood Reporter and MarketingProfs.com.

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, Senior Automotive Editor - March 22, 2016

If you owe more on your trade-in than it's worth, the difference is called negative equity. A car with a value of $4,000 and a loan balance of $6,000 would have $2,000 in negative equity.

Your lender may allow you to roll negative equity into the loan for your new car. So, if your old car has negative equity of $2,000 and you're borrowing $20,000 to buy your new car, the total value of your new loan would be $22,000.

Is this ever a good idea, especially if you're getting a bad credit auto loan with a higher interest rate? The answer is maybe. It can be a smart financial decision, for example, when your trade-in starts needing expensive repairs or maintenance.

Remember, though, that the more negative equity you roll into a new loan, the longer you'll be upside-down—or owing more than your car is worth. And you could find yourself in an expensive cycle if you keep buying cars this way.

Find out how much you're eligible for in auto loans »

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, Senior Automotive Editor

Christian Gulliksen is the Senior Automotive Editor for CarsDirect. He was formerly a senior editor with Robb Report magazine, and has contributed to publications like Worth, Variety, The Hollywood Reporter and MarketingProfs.com.

Follow On: Google+ | Website

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