How to Trade In a Car With Negative Equity

When the amount owed on a car loan exceeds the vehicle’s current market value, this situation is known as negative equity, or being “upside down” on the loan. Despite owing more than a car is worth, trading in a vehicle with negative equity remains a possibility for consumers.

Understanding Negative Equity

Negative equity occurs when a car’s depreciation outpaces the rate at which its loan balance is paid down. For instance, if a car is valued at $15,000 but has a loan balance of $18,000, there is $3,000 in negative equity.

Rapid vehicle depreciation is a primary cause; new cars, for example, can lose a significant portion of their value, sometimes up to 20%, within their first year of ownership. Additionally, opting for long loan terms, such as those extending for six to nine years, can lead to lower monthly payments but often results in the car’s value depreciating faster than the loan balance decreases. High interest rates on the loan and making a small or no down payment at the time of purchase also exacerbate the problem, as less principal is paid off early on.

Determining Your Negative Equity

To understand your specific financial standing, calculating the exact amount of negative equity is a necessary step. This calculation involves comparing your current loan balance with your vehicle’s present market value.

The first step involves identifying the current outstanding balance of your car loan. This information is typically available by reviewing recent loan statements, logging into your lender’s online portal, or directly contacting your loan provider. It is important to obtain the exact payoff amount, which includes any accrued interest or fees.

Next, determine your car’s current market value. Reputable online valuation tools, such as Kelley Blue Book (KBB) or Edmunds, can provide accurate estimates based on your vehicle’s make, model, year, mileage, and overall condition. Providing precise details about your car’s features and any damage helps ensure the most accurate valuation. Once both figures are obtained, simply subtract the car’s market value from the loan payoff amount; a positive result indicates the presence and amount of negative equity.

Approaches to Trading with Negative Equity

When faced with negative equity, consumers have several approaches to consider when trading in their vehicle. Each method carries distinct implications for the new car purchase and overall financial situation.

One common method involves rolling the negative equity into the financing of a new vehicle. This means the outstanding balance from the old loan is added to the principal of the new car loan. For example, if you have $3,000 in negative equity, that amount would be included in the financing for your next car, increasing the total loan amount. While this option avoids an immediate out-of-pocket payment, it significantly inflates the new loan’s principal, potentially leading to higher monthly payments and a longer repayment term.

Another approach is to pay off the negative equity difference directly. This entails paying the amount by which your loan balance exceeds the trade-in value out of pocket at the time of the transaction. For instance, if you owe $10,000 and the dealership offers $7,000 for your trade-in, you would pay the $3,000 difference directly to the lender. This strategy allows you to begin the new car loan with a clean slate.

Selling the vehicle privately offers a third alternative, which can sometimes yield a higher sale price than a dealership trade-in. A private sale might help reduce or eliminate the negative equity, as you might secure a price closer to the car’s true market value. After selling the car, the proceeds are used to pay off the existing loan. If the sale price is less than the loan balance, the owner must cover the remaining difference. This method requires more effort and time compared to a trade-in, but it can be financially advantageous.

Financial Impact of Trading with Negative Equity

Trading in a car with negative equity, regardless of the method chosen, has notable financial consequences that extend beyond the initial transaction. The decisions made during a trade-in can influence long-term expenses and credit standing.

Rolling negative equity into a new loan directly results in a higher principal amount for the new vehicle. This increased loan amount translates to higher monthly payments or an extended loan term, meaning more interest is paid over the life of the loan. For example, consumers who rolled negative equity into new car loans in Q2 2025 saw average monthly payments of $915, which was $159 more than the overall industry average.

Starting a new loan already “underwater” can also accelerate the depreciation cycle. If a significant amount of negative equity is rolled over, the new vehicle may immediately be worth less than the new, larger loan amount. This situation makes it difficult to achieve positive equity, especially if the new car also depreciates quickly. This cycle can lead to a continuous state of owing more than the car is worth, hindering future trade-ins or sales.

Ultimately, carrying negative equity from one vehicle to the next contributes to a higher total cost of ownership over time. The additional interest paid on the rolled-over debt adds to the overall expense of owning vehicles. This financial burden can impact a consumer’s ability to save or invest. Managing debt, including how negative equity is handled, also affects one’s credit score, influencing future borrowing opportunities and interest rates.