Questions about negative equity and trade in (selling)

etsukocos

I owe 24,500 on my current loan.
My KBB value is roughly $15,000.
I am negative $9,500 (equity).

I am wondering about what my best path is in regards to getting rid of my loan.

I'm considering a used car under $10,000 on a new loan, and then privately selling my current car to get the best bang for my buck. If I can afford this, would it be a good idea?

I contacted one dealer and they are unable to help me due to my negative equity. Unless of course, I have a large down payment. I do not have such a payment as of right now.

Would it be a good idea to try and get a loan from the bank (if low interest) to pay off my negative equity and then trade in? Should I wait until I'm even before trying to do anything?

Refinancing is another option I looked at.

I suppose I just want some advice and perhaps some theoretical numbers in any given path that will ultimately save money in the long run.

Thank you.

etsukocos

If I was able to get a used car for $5000, and used my current car as a trade in (considering the numbers posted above) what kind of numbers would I be looking at? say %3.5 interest was tagged on. I'm not really sure how all the numbers work with trade ins.

PF_Flyer

Even if you can re-fi at a lower rate, the amount you owe goes up. They loan you $24,500 to pay off your original loan, but they charge interest on that amount, so you'd owe more. Re-if at a lower rate and a longer term might lower your monthly payment, but the amount you owe still goes up.

You're NOT going to find some magic combination that works. Let's say you found a used car for $5K. Why would you trade a car worth $15,000 (which you currently have) for it? Looked at from the other side, why would I NOT trade you a car I value at $5K for yours?? I come out pretty far ahead on that one... since YOU are the one that still owes the $24K on it.

You can't "buy your way out" of owing that $24,500.

Let's say that magically, a dealer was going to give you the full KBB value you stated to trade in your car, and you used that money to buy that $5,000 used car. (It does NOT work this way, this is just to illustrate a point)

In theory, you would now have a $5,000 used car, and $10,000 in cash. Again, this is NOT how it works or how it would happen, but it makes my point.

So now you have:

$24,500 you STILL owe on the loan, but let's call it $14,500 because of the magic $10,000
A car that is worth less than $5,000, but let's call it $5,000
And you have negative equity of $9,500

The negative equity is important because it SHOULD prevent you from thinking about trading for another vehicle. Would you buy a $5,000 car if you had to borrow $14,500 to do so?

ANY real world transaction you try is only going to add to the amount of money you owe. The way you get rid of a loan, is to pay off the loan, not add to it. Not pleasant, but that's how it works.

This is why I consider my car to be worth 1 Car. Our latest car purchase, we made no down payment because the payment for financing the whole amount fit in our budget. If I looked at it as a "negative equity" thing, I'm probably still in negative territory because of what the trade in value would be right now compared to what I still owe. If I decided to trade and get a new vehicle, I would add to the amount I owe. So any new vehicle is going to wait until I'm pretty close to paying off the loan, and the new payment fits in the budget.

Sorry I can't be of more help

PF_Flyer

Just a follow up to illustrate something about negative equity. At the time of purchase, we were about $2,000 negative equity on our latest car. We're about 18 months into the 60 month loan, and sitting at about $4,000 negative equity given what we'd likely get in a trade versus what we still owe. That negative value will go up because the car's value will depreciate faster than the rate we are paying off the loan. Once the trade in value starts to level off a bit, that negative number will decrease as the payments make a faster dent in the loan than the rate the car depreciates at.

If we decided to trade in our car today and buy the latest model year of the same vehicle, we would add about $6,000 to the amount we owe, and be making higher payments for the next 60 months instead of our current payment for the next 42 months. And that new car would start off at around $3,000 in negative equity. The negative equity is more like a measurement that you can use to help make a decision about whether you can afford to switch to a new car.

Trading cars and bumping up the loan amount is a bad spiral to get in. It's kind of self-limiting in that you will get to a point where they won't loan you MORE money until you pay off what you owe.