Negative equity occurs when you owe more on your current car loan than the vehicle’s current market value. This situation can complicate the process of financing a new car because the outstanding balance on your old loan doesn’t just disappear. Instead, the remaining amount you owe may need to be added, or “rolled into,” your new loan. This can increase the total amount you’ll need to borrow, leading to higher monthly payments and more interest over the life of the new loan.
When financing a new car with negative equity, lenders consider the risk involved in covering both the new car and the remaining debt from your old one. To offset this, you might be required to make a larger down payment to reduce the overall loan amount. This can help lower your monthly payments and reduce the amount of interest you’ll pay in the long run, but it still means you’re financing more than just the cost of the new vehicle.
To avoid or minimize the effects of negative equity, it may be wise to pay off more of your current loan before considering a trade-in. If that’s not an option, ensuring you have a significant down payment or choosing a more affordable car can help make the new loan more manageable. Carefully reviewing your finances and loan terms can help you navigate negative equity and find the best solution for your situation.
How Does Negative Equity Affect My Ability to Finance a New Car? – Video Transcription:
Wondering how negative equity affects your ability to finance a new car? Negative equity means you owe more on your current car loan than the vehicle is worth. This can complicate things when financing a new car, because that unpaid balance may need to be rolled into your new loan. As a result, you could face higher monthly payments and more interest. To manage negative equity, consider making a larger down payment or waiting until you’ve paid off more of your existing loan before trading in your vehicle.