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To be upside-down on your car -- to owe more than it is worth -- makes trading in that car a challenge. However, the Kelley Blue Book website notes that well over half of trade-ins are in an upside-down position. It is always possible to trade a car on which you owe more than its blue book value. The question is whether you want to pay the cost.
Buying a car with a longer term -- greater than four years -- loan with little or no cash down typically puts the car buyer in a negative equity/upside-down position from day one of ownership. The car will depreciate faster than the loan pays down, leaving the car owner upside down for most of the term of the loan. Trading a car early when it is worth less than the loan payoff means the total loan balance must somehow be paid off.
One solution to getting out from under an upside-down car loan is to put up a larger cash down payment when you trade in the car. If you pay off the difference between the car loan and the book value plus some money to act as the down payment on the new car, you can get out of the old and into a new car with a reasonable car payment and potential to not get so upside down in the new vehicle. This option can obviously only be used if you have the cash available, which may be thousands of dollars. The benefit is that you start a new car loan with positive or little negative equity.
Another option is to work with the dealer to include or roll some or all of the negative equity from your trade-in into the loan on a new car. Auto lenders limit loan amounts based on the price or cost of a new car, but with good credit it may be possible to roll several thousand dollars or more of negative equity into a new loan. The downside is that you end up with a large car payment and are even further upside down on the new car. If you have more negative equity in your trade than can be absorbed into the new loan, you may still need to put up some cash to make the deal work.
One way to get out of a cycle of being thousands of dollars upside down each time you want to get a new car is to lease rather than finance the new car. Negative equity from your trade can also be added to the cost used to calculate a lease payment. The benefit of a lease is the shorter term at a reasonable payment. For example, if you finance the new car for 60 months and include your negative equity in the loan you will probably still be upside down after three years. However, with a three-year lease, at the end of the term your financial obligations are done and you can turn in the car to the leasing company. Then you can go buy or lease a new car without any additional financial burden. Leases are more restrictive than a financed purchase, so understand the fine print before committing to a lease.
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