Will a Dealer Pay Off My Trade-In No Matter What?

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Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.

, Contributing Writer - September 3, 2020

Some dealerships say that they can cover your trade-in’s loan amount no matter what. If they can, how do they manage it? Here’s the scoop on trading in a vehicle that you still owe money on, and the risks of trading in a car when you owe more than it’s worth.

When a Dealer Pays Off Your Trade-In

Borrowers who owe more on their vehicle than they’re likely to get from a trade-in offer could find themselves looking for dealerships who can “guarantee” that their auto loan can be 100% paid. However, when a dealer says that they can completely pay off your trade-in’s loan amount “no matter what,” you should be a little wary of how they’re managing to accomplish this.

When a dealership offers to pay off the total amount that you owe on your car, even if it’s more than what the vehicle’s worth, it usually means they’re tacking your negative equity on to your next auto loan. If you have negative equity, which means you owe more on your current car loan than the vehicle’s actual value, adding it to your next auto loan balance can spell trouble.

It may seem like a dealer is doing you a service by accepting your trade-in and covering your negative equity. However, you're going to end up paying what you originally owed and more by the time you finish paying for your new car loan.

Here’s an example to better illustrate:

Let’s say your trade-in is worth $5,000, but you owe $7,000 on the loan.

Say the dealership offers you the full $7,000 that you owe so the vehicle gets a full payoff amount. You’re purchasing another car with a selling price of $10,000. The $2,000 that the dealer paid (or overpaid) on the value of your trade-in is added to your next auto loan amount. Instead of financing only $10,000, you're now paying $12,000 to cover the trade-in’s negative equity.

While the dealership is able to pay off your original car loan, you’re starting out your next auto loan in a negative equity position. The negative equity on your first loan doesn’t simply go away, it’s just added to the price of the next financed vehicle. This is called rolling over negative equity.

The Trade-In Treadmill

Negative equity happens because cars are depreciating assets – they lose their value over time, and that never stops. Vehicles can lose around 10% to 20% of their value within your first year of ownership. Eventually, depreciation slows, but, at first, it's common to owe more on your loan than the car is worth, due to the initial drop in value.

If you keep rolling over your negative equity onto your auto loans, without being able to get out of the cycle, it’s called being stuck on the trade-in treadmill. It can be hard to get off this treadmill once it gets going.

Rolling over your previous vehicle’s loan balance means that you’re essentially paying for two car loans with one payment. Because the total amount that you owe after you roll over can get really high, it can be hard to pay off in a timely manner. The longer it takes you to pay off your auto loan, the more potential you have for staying in a negative equity position.

If you have bad credit and roll over negative equity, this combination has the potential to cause trouble down the line due to the interest charges – bad credit borrowers tend to pay higher interest rates on car loans. If you have a high loan amount and a high interest rate, it can mean paying much more than the vehicle is worth.

Combine all these factors and it can make it hard for someone to earn equity. If you never earn equity because you’re too busy paying off the negative equity you just rolled over, you’re stuck having to roll over on your next loan again – and again – and maybe even again. It becomes a treadmill of always having a car payment and no equity to help you with your next vehicle purchase.

Before you consider rolling over all your negative equity, mull over your options and see if you're OK to go ahead with an alternative.

Dealing With Negative Equity

Having negative equity on your trade-in isn’t the best feeling, but it isn’t uncommon. In fact, many borrowers find themselves in this exact position. Negative equity is common if you have either: just recently financed a brand-new car, have a high interest rate, didn’t make a large down payment, or chose a long loan term. A combination of any or all of these negative equity risk factors can mean paying a lot more than what the vehicle is actually worth.

To get out of negative equity, you’ve got three main options to consider:

  • Pay off your negative equity out of pocket if you can.
  • Make extra payments to catch up to the car's value faster.
  • Simply wait for your loan amount to catch up to your vehicle’s value.

Rolling over your negative equity should be considered a last resort. For example, if your car no longer runs and you need another to get to work, and you don’t have the cash on hand to pay off the negative equity, then rolling it over on your next loan may be the best solution.

However, if you’re considering trading in your current vehicle simply because you want another one, reconsider the costs and risks of paying for two cars on one loan.

Moving Forward

If you’re considering a dealer that says they can pay off your trade-in’s total loan amount no matter what, it means that you’re likely in a negative equity position. It's not great, but it’s also not the end of the world! Like we said, it’s common, but there are other ways to combat negative equity besides adding it to your next one.

However, if you’ve got no choice, then we might be able to help. Here at CarsDirect, we have a nationwide network of dealerships that are signed up with bad credit auto lenders. These lenders look at more than just your credit score to consider you for financing.

If you’re having issues finding a dealer that can work with your unique situation, fill out our free car loan request form. We’ll look for a dealership in your local area.

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.

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