Negative equity occurs when the value of a vehicle falls below the amount of money owed on a loan. This can happen for a number of reasons. Depreciation, changes in the market, or interest charges can all cause negative equity. Let’s look at a simple example. If you buy a car for $20,000 and take out a loan for $18,000, but the car’s value drops to $15,000, you now have negative equity of $3,000.

Negative equity can make it difficult to buy a new vehicle because it increases the amount of money you need to borrow. This means you may not be able to qualify for a loan or may have to pay higher interest rates. Additionally, if you trade in your old vehicle with negative equity, you may be required to pay off the negative equity before the dealership can give you credit for the trade-in.

The good news is that negative equity on your old car doesn’t mean it is impossible to buy a new vehicle. There are several options available to you to overcome negative equity and still buy a new vehicle. Let’s look at these options a little closer:

Pay Down the Negative Equity: One of the simplest ways to deal with negative equity is to pay it off before buying a new vehicle. Making extra payments on your existing loan or paying a lump sum are the simplest ways to take care of that pesky negative equity. Once you’ve paid off the negative equity, you can trade in your old vehicle without any issues.

Roll Over the Negative Equity: Another option is to roll over the negative equity into your new loan. This means that the negative equity amount will be added to the amount you are borrowing for your new vehicle. While this may make your new loan larger and increase your monthly payments, it can be a good option if you need a new vehicle right away.

Sell Your Vehicle Privately: Selling your old vehicle privately can also be a good option for dealing with negative equity. This allows you to get a better price for your old vehicle than you would get from a dealership, and you can use the extra money to pay off the negative equity before buying a new vehicle. It does mean a lot more work for you, as you would have to list and manage the sale of your own vehicle, and this could take quite some time.

Lease a Vehicle: Leasing a vehicle can also be a good option for people with negative equity. Since leases typically have lower monthly payments than loans, you may be able to afford a new vehicle even with negative equity. However, keep in mind that you will not own the vehicle at the end of the lease, and there may be restrictions on the number of miles you can drive.