Can You Roll Negative Equity Into a Used Car?

When a car’s market value falls below the outstanding balance of its loan, the owner is in a state of “negative equity.” This means more money is owed on the vehicle than it is currently worth. It commonly arises when individuals seek to trade in their existing vehicle for a used car, only to discover their trade-in value is insufficient to cover the remaining debt.

Understanding Negative Equity

Negative equity stems from factors that cause a vehicle’s value to decline faster than the loan balance. New cars can lose a significant portion of their value within the first year of ownership. This rapid depreciation outpaces the rate at which the loan principal is paid down, especially in the early stages of a loan.

Financing a car with a small or no down payment also contributes to negative equity, as a larger loan amount is taken out from the start. Extended loan terms, such as 60, 72, or even 84 months, slow the equity buildup, meaning the loan balance decreases more gradually than the car’s market value. Higher interest rates further exacerbate this issue, as a larger portion of early payments goes towards interest rather than principal reduction.

How Rolling Negative Equity Works

Rolling negative equity into a used car loan means the outstanding debt from your current vehicle is added to the financing of your newly purchased used car. Lenders may permit this, effectively combining the old debt with the new vehicle’s price into a single, larger loan. This practice allows a borrower to transition to a different vehicle without immediately paying off the deficit from their previous loan.

For example, if a driver owes $5,000 more on their current car than its trade-in value, and they intend to purchase a used car for $20,000, the new loan would become approximately $25,000 before considering taxes, fees, and interest. Lender approval for such an arrangement often depends on the borrower’s creditworthiness, the total amount of negative equity, and the value of the used car being purchased. Lenders may finance the new vehicle’s value, including the rolled-over negative equity.

Financial Implications of Rolling Negative Equity

Rolling negative equity into a new used car loan has several financial consequences. The immediate impact is a higher principal amount for the new loan. This larger principal translates to increased monthly payments to repay the combined debt.

To keep monthly payments manageable, borrowers opt for longer loan terms, extending repayment periods to 72 or even 84 months. While this lowers the immediate monthly burden, it increases the total interest paid over the loan’s lifetime. Longer terms can lead to significantly more interest paid overall. This perpetuates the cycle of negative equity, making it challenging to build equity in the new vehicle from the outset.

Alternatives to Rolling Negative Equity

For individuals facing negative equity, several alternatives can help mitigate or avoid rolling the debt into a new loan. One approach is to pay off the negative equity balance at the time of sale or trade-in. This clears the old debt, preventing it from being added to a new loan.

Another strategy involves selling the current vehicle privately, which often yields a higher price than a dealership trade-in. Any remaining negative equity after the sale would then need to be covered out-of-pocket. Alternatively, keeping the current car longer allows for more payments to be made, reducing the loan balance and potentially building positive equity over time.

Refinancing the existing car loan can also be an option if interest rates have improved, potentially lowering monthly payments and accelerating principal reduction. Lastly, considering a less expensive used car for the next purchase can reduce the overall new loan amount, making it easier to absorb any unavoidable negative equity or pay it off sooner.