How to trade in a car with negative equity

When you owe more than your vehicle is worth, also known as a negative equity position, but still intend to trade in, then planning your next steps will help you to get the most out of the deal.*

Learn how you can approach a negative equity problem below.

Rolling over your negative equity

In this situation, it’s common for negative equity to be rolled into financing for the new vehicle. That means you’ll effectively be paying off your previous car along with your new one. But you’ll do so with a larger financing amount on which you’ll pay interest.

Such an arrangement can increase your borrowing costs and make it harder to reach positive equity, so give this some serious thought. However, if you need or still want to trade in your vehicle, there are a number of steps that can lessen the severity of these effects and keep your expenses down.

  1. Check how much negative equity you have
  2. First of all, you’ll want to know just how much negative equity you’ve got. Log into your account or contact your lender to get the payoff amount on your current contract. Then look up the trade-in value of your vehicle at sources like J.D. Power, Edmunds and Kelley Blue Book and compare it to the payoff to see the difference. If your vehicle is worth $10,000 but you still owe $15,000, that’s $5,000 in negative equity that could be rolled over into your new financing.

  3. Consider a cheaper vehicle
  4. One way to reduce the size and cost of the new debt is to buy a less expensive vehicle. You could also go for a used model to help offset the effects of depreciation, especially when combined with negative equity. Depreciation – the reduction in a vehicle’s value over time – is something that could increase the “upside down” problem you encountered previously. New vehicles typically depreciate by 20% in their first year and by about 50% after year three, so even buying a nearly new car could help you reach positive equity more quickly.

  5. Choose a suitable financing period
  6. When rolling over debt, it’s tempting to choose a contract term that’s on the longer side to keep monthly payments down. Be aware that this route will typically take you longer to build up equity in the vehicle, and the accumulated finance charges mean you could pay more for your vehicle overall. A shorter contract term will increase the monthly payment but speed up the rate at which you can gain equity and pay off the vehicle completely.

  7. Pre-qualify before visiting the dealer

Consider seeing if you pre-qualify for financing before you go to the dealership to save time and help yourself stay withing your budget. Drive® affords you the option of getting pre-qualified with a soft credit pull that has no impact on your credit score.

Once you’re pre-qualified, you can access our Budget Customizer and you’ll be able to pick financing options and terms that suit your needs. Plus, you’ll get to look through all the inventory at a participating dealer that fits the terms you’ve selected. This can save you time and energy when you’re going to the dealership.

Alternatives to trading in with negative equity

Trading in a vehicle with negative equity may be something you’d like to do, but there are other options which may save you money. Think about the options below as well.

Pay off the negative equity

If you can afford it, an important option to keep in mind is to simply pay off the negative equity – whether as a lump sum or by adding to your monthly payments. Most auto financing is structured using the simple interest method in which extra payments go only toward the principal financing amount and not interest. If you’re able to afford it, this could be an option to eliminate your negative equity before you trade in your car.


Refinancing with new terms, such as a shorter duration and lower APR, is another way to accelerate the journey into positive equity.

Pre-qualify with no impact on your credit score

Keep the vehicle and wait

If it’s serving you well, you could simply keep your car, continue making your regular payments and wait until it’s paid off before purchasing another.

Next Steps

Having gained a better grasp of how to tackle your negative equity, you can now make a decision and shop with confidence. If you’re planning to trade in, consider getting pre-qualified with Drive and get a response in two minutes or less with no impact to your credit score.

*These statements are informational only and should not be construed as legal, financial, tax or other professional advice.

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