how much negative equity can i roll over
July 18, 2003: 12:20 PM EDT
By Peter Valdes-Dapena, CNN/Money Staff Writer
NEW YORK (CNN/Money) - It's called being "upside-down" in your automobile, but it has nothing to do with scary car-crash scenarios. It's when you want to sell or trade in your car, even though you still owe more than the vehicle's current value.
Perhaps you simply made a bad choice and you just can't live with the ugly lemon any longer. Or a major life change may mean you need a different set of wheels. (Where are you going to put a baby seat in that Mazda Miata?)
If you're trying to buy a new car while you've paid off less than the value of your current car, you're going to lose money on the deal. Sorry, but it's unavoidable. There are steps you can take to minimize the damage, though.
Unquestionably the best way out of this problem is simply to wait. If you don't absolutely need to change cars, stay in the one you have until you've paid off at least enough of the loan to get "right-side-up" again.
If you can't do that, don't just shrug your shoulders and trade the car in. First, call your lender find out the total amount outstanding on your car loan. Then check to see how much your current car is now worth. (Web sites like Kelley Blue Book and Nadaquides.com can help you there.)
Once you have that information in hand, here are some strategies to consider:
Sell the car yourself Yes, it's a hassle to sell a car. But doing so lets you maximize the value in the car.
"If a person sells their own used car they will put $2,000 to $3,000 more in their purse," said Linda Goldberg, CEO of CarQ.com and executive director of the National Association of Buyer's Agents. Especially in a situation like this, you'll need that extra money.
Basically, when you trade a car in, you're getting the wholesale price. When you sell it yourself, you're getting the higher retail price.
Think used instead of new When shopping for that new set of wheels, think used instead of new. Try to find something that's at least as old as the car you're leaving or even a little older. That way, the car you buy will have lost as much value as the car you just sold, making for an easier transition.
"You can get back on cycle later with a new car," said Mark McCready, director of pricing strategy for Carsdirect.com.
Don't trade a good loan for a bad one Of course, even after selling the car you'll still have payments to make. Before you can sell your car, you will have to pay off the outstanding balance on the loan in order to free up the car's title. Assuming you don't have enough cash on hand to do that, you'll have to take out some other sort of financing to cover that pay-off. McCready suggests considering a low-interest home equity loan as one way to refinance the remaining debt on your old car.
In general, you don't want to roll over your old loan into a new loan unless the new loan is at a much lower interest rate.
However you decide to finance the transaction -- whether you want to consolidate the old and new car loans or not -- just make sure to do the math to make sure it actually benefits you. Beware of low payments that come at the cost of an extended repayment period. By taking even longer to pay off the next car, you could be inviting another "upside-down" situation later on.
Before you decide to do any of this, think it through. Find out how much you can reasonably expect to get for the car you have and how little you can reasonably expect to pay for a car you want. Then shop around for financing.
What is negative equity and how can it affect my next car purchase?
If you find yourself in a negative equity situation - your car is worth less than the loan balance - you are not in an ideal position. It's called being "upside down" for good reason, and you need to be careful about how you handle it. The ramifications can be long-term if not handled with care.
Once you determine how much the vehicle is worth and compare it to your loan balance, the rest is up to you. If you're upside down, your next car loan is going to be negatively impacted in some way, so if you have your heart set on a new vehicle and the loan that goes along with it, some damage control is in order.
Obviously, improving your credit is a great place to start, and setting realistic expectations for the car you want and how much you can afford to pay are just as important. You don't want to perpetuate your upside-down situation any longer than you have to!
Did you know that in 2015, nearly one-third of car buyers who traded in their cars still owed money on their trade-in vehicles? But that doesn't make it OK to make this negative situation worse. Probably the best thing to do is call a City Lending loan counselor at 800-391-4346 and get some advice. Remember, when you get a new car loan and you're upside down, you will still have to pay off the amount you owe on your current car.
We want to help you explore all your options, but you may need to stick with your old car until you at least reach a break-even point in the loan, or better yet, pay it off outright. City Lending might be able to help you with that too.
When you firmly decide to trade your vehicle in for a newer one, it's imperative that you understand how the dealer is handling the negative equity you're bringing to the table. Make sure everything you've discussed and agreed upon is included in the contract before you sign it.
Another option is to have the new lender pay off the loan by lowering the monthly payments. The bad news is, the term of the loan will likely become longer. You always want to try to keep the term as short as you can so the loan life doesn't exceed the life of the vehicle!
Dealer incentives can definitely help with either of these options, and through our nationwide network of dealer partners, we can help you find the best vehicle and match it with a price you can afford.
How to Roll Negative Equity Into a Lower Interest New Car Loan
Rolling negative equity into a lower interest car loan isn't an option for everyone. Your overall credit history affects your loan-to-value ratio, which is a percentage of a car's bank-determined value you're approved to borrow. This percentage might be as low as 60 percent of the car's lending value or as much as 120 percent. Rolling money into a new loan might not be a possibility if your credit has suffered or hasn't improved since your original loan. If you have good credit and rates have decreased since your current loan application, you could save thousands of dollars by refinancing your loan at a lower interest rate.
Call or visit your current lender to obtain your loan's payoff balance. Ask for the per-diem: the amount of interest added to your balance daily. When you find your new lender, you'll provide both figures for an accurate payoff amount.
Visit potential lender websites to gauge possible rate offers. Call to confirm any advertised rates for used cars, as some lenders impose mileage or age restrictions for used car loans. Compare the offers to determine where you'd like to apply for your refinance.
Submit a credit application to the lender of your choice, either in person or on the phone. Provide your car's year, make, model, mileage, additional features and payoff balance with your application. Discuss any paperwork requirements for your state and prepare your paperwork as necessary.
Arrange to sign your new contracts and handle any paperwork for your state, which could include that you supply your new lender with the vehicle's title, once you're approved for your loan. Contact your insurance company to update your lien holder information and submit proof of insurance to your new lien holder.
- If you aren't approved for the total loan amount because of the negative equity from your previous loan, the lender might ask you to provide a down payment. The down payment keeps your loan in line with your loan-to-value ratio.
- If you can't provide a down payment and your lender requires one for a loan approval, try a different lender, or try to save for a down payment.
Shanan Miller covers automotive and insurance topics for various websites, blogs and dealerships. She has extensive automotive experience, including auction, insurance, finance, service and management positions. Miller has worked for dealer sales events around the United States and now stays local as a sales and leasing consultant for a dealership.
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