What is negative equity and why you should care

If you’re shopping for a new, used, or certified pre-owned vehicle and you have a trade-in, you should know about negative equity. Knowing what it is and how to deal with it can help you make a smarter buying decision.

What negative equity is

Negative equity, also referred to as being “upside down” or “underwater”, means you owe more on your vehicle than it’s worth. In other words, if you were to sell or trade in your car, the amount you’d receive wouldn’t be enough to pay off the remaining balance on your loan.

How negative equity happens

Negative equity can happen for several reasons:

• Depreciation: Cars lose value over time. New vehicles can lose 20% or more of their value in the first year alone.
• Low or no down payment: If you didn’t put much money down when you bought your vehicle, you may owe more than the car is worth from the start.
• Long loan terms: Stretching your loan over 72 or 84 months means you’re paying off the balance more slowly, while the car continues to depreciate.
• Rolling over a previous loan: If you traded in a vehicle with negative equity and rolled that balance into your new loan, you started your new loan already upside down.

Why it matters when buying a vehicle

If you’re planning to trade in your current vehicle, negative equity can affect your next purchase in a big way. The remaining balance from your old loan may be rolled into your new loan, increasing the total amount you finance. That means higher monthly payments and potentially more interest paid over the life of the loan.

What you can do about it

Here are some tips for dealing with or avoiding negative equity:

• Make a larger down payment: The more you put down upfront, the less likely you are to owe more than your vehicle is worth.
• Choose a shorter loan term: A shorter term helps you build equity faster.
• Pay extra when you can: Paying more than the minimum each month reduces your balance faster.
• Wait to trade in: If possible, wait until you’ve paid down enough of your loan so that the trade-in value covers the remaining balance.
• Consider GAP insurance: Guaranteed Asset Protection insurance can cover the difference between what you owe and what your car is worth if it’s totaled or stolen.

Let us help

At SVG Auto Group, our finance team is here to help you understand your options. Whether you’re dealing with negative equity or just want to make sure you’re getting the best deal, we’ll work with you to find a solution that fits your budget.