Auto Trade-Ins and Negative Equity: When You Owe More than Your Car is Worth

What is Negative Equity?

With rare exceptions, the older a car gets, the less it’s worth. And accidents, repairs, or other damage can further reduce its value. So, if you borrowed money to buy a car, it’s possible you owe more on your car loan than the car is worth. When that happens, you have “negative equity” in the car.

How Negative Equity Works With a Trade-In

Some car dealers say you won’t be responsible for the remaining balance on your old car loan when you trade in your old car. But that might not be true. Instead, some dealers just roll over the negative equity into your new car loan, so you still end up paying it.

Example

Say you want to trade in your car for a newer model.

Your old car is worth $15,000. You still owe $18,000 on your car loan.

That means you have $3,000 in negative equity. To trade in your car, you have to pay that $3,000.

Some dealers will promise to pay the $3,000 off themselves — but they’ll really pass the cost on to you.

They might add the $3,000 to your new car loan, take $3,000 from your down payment, or both.

The problem? Now you’ll have a bigger loan, and you’ll have to pay interest on that $3,000 plus the cost of your new car.

If a car dealer told you they would pay off your car themselves, but they really rolled the cost into a loan, that’s illegal. Report it to the FTC.

How to tell if your negative equity is part of your new car loan

Before you sign a financing contract, the dealer must give you certain disclosures about the cost of that credit. Read them. Look for details about the downpayment and the amount financed on the installment contract. You might have to do the math to understand how the dealer is handling your negative equity. Be sure you know before you sign the contract. Otherwise, you may wind up paying a lot more than you expect.

Dealing with Negative Equity

If you think your trade in has negative equity, find out what your current vehicle is worth before you negotiate the purchase of a new car. Check the National Automobile Dealers Association’s (NADA) Guides, Edmunds, and Kelley Blue Book. If you have negative equity in a car, consider these options:

• Wait to buy another car until you have positive equity in the one you’re still paying for. For example, consider paying down your loan faster by making additional, principal-only payments.
• Sell your car yourself. You might get more for it than what a dealer says it’s worth.
• Ask the dealer how they’ll handle negative equity if you decide to go ahead with a trade-in. Read the contract carefully. Make sure any oral promises are included. Don’t sign the contract until you understand all the terms and the amount of your monthly payment — and what’s included.
• Negotiate your new loan for the shortest amount of time you can afford, especially if the negative equity amount is rolled into the new loan. The longer your loan term, the longer it will take to reach positive equity in your new car — and the more you’ll pay in interest.

Report a Problem

Report problems with dealer advertising and sales and finance contracts to

• the Federal Trade Commission at ReportFraud.ftc.gov
• your state attorney general

Check out other FTC articles about buying and owning a car.