How to Trade in a Car With Negative Equity

When you walked into the dealership, you fell in love with your current car. It was so shiny and new.

Five years later, you’ve fallen out of love with your gas-guzzler with the thread-bare tires and are wondering if you could just trade it in for the next beauty.

Then you remember you still owe on your current hunk of junk. And that to get monthly payments low enough for you to afford your current car, you jumped at the six-year (or seven-year… or eight-year) term the dealer offered.

You’re not the first person to fall for a set of wheels that’s beyond reach, especially as car loans have continued to climb. The average loan amount for a new vehicle was $37,746 in the third quarter of 2021, according to Experian.

To offset the cost, more people are lengthening their loan terms to lower their monthly payments. In fact, the 72-month car loan is now the most popular car loan option, with the 84-month loan coming in second, according to Edmunds. For the non-mathletes among us, that’s a six- or seven-year car loan.

Then consider that new cars lose 20% of the value the moment you drive them off the lot and depreciation accounts for more than a third of the average annual cost to own a car, according to AAA.

All of those factors combine to create the scenario where you owe more than your car is worth, which means you have negative equity in your loan — aka, your car loan is upside down or underwater.

Unfortunately, there’s not much use staring in the rearview mirror at this point about what you should have done with your old car’s loan, but you still have options to recover — it’s just a matter of making smart financial decisions.

What to Do If You Have an Upside-Down Car Loan

Before we get ahead of ourselves, are you sure your vehicle is worth less than what you owe? Let’s run the numbers.

How to Calculate Your Car’s Equity

Here’s how to calculate the equity in your vehicle:

Value of your vehicle – loan payoff amount =…