How Much Negative Equity Can I Carry Over on a Car Loan?
There is no set amount of negative equity that can be built into your next car loan. If you need another vehicle but your current vehicle is worth less than what you currently owe your lender, you may be able to carry the negative equity back onto your next car loan. But should you? Here are a few tips.
Ride on the negative equity of your vehicle
When you renew your negative equity, you are adding the difference between the value of your car and the amount of your loan on your next car loan.
If you have $ 1,000 of negative equity on your current vehicle and you buy a vehicle for $ 10,000, your next loan balance would be $ 11,000 with negative equity built in. You are essentially combining your loan balances into one, so it’s similar to debt consolidation.
However, whether or not this is possible depends on what you can realistically afford. A lender may not approve a loan that is too much over the value of the next car because lenders also consider your loan-to-value ratio (LTV).
An LTV is the amount of your loan compared to the actual cash value of a car (ACV). It is calculated by dividing your loan amount by the LCA of your vehicle. LTV is usually expressed as a percentage, and most auto lenders typically have a maximum loan-to-value ratio of around 125%. This means that your vehicle loan should not exceed more than 125% of its value.
Since the negative equity rollover means adding to the total balance of your next car loan, depending on the amount of negative equity in your current car, it could exceed this common rule by 125%.
The amount of negative equity you can carry forward also depends on your personal situation. Each lender varies in their requirements and each borrower’s circumstances are different, including the income and disposable income they have. If your loan balance with negative equity factored in creates a high monthly payment for which your disposable income simply has no room, you are unlikely to be approved for the auto loan.
Believe it or not, lenders don’t want to approve auto loans that overtake borrowers. And they prefer to approve loan amounts that are comparable or close to the value of the vehicle.
Carry forward amounts may vary
Some borrowers who are underwater on their car loan are considering carrying negative equity on their next car loan. Depending on how much negative equity you have, you may be able to roll it all over, but that depends on your budget, what you’re eligible for, and which lender you’re working with.
The more negative your car equity, the more difficult it can be to sell or trade in your vehicle. If your car loan is hundreds or even thousands of dollars more than your car’s current market value, then selling it for what you really owe can be a challenge.
Chances are, the amount of negative equity in your vehicle is unique to you. Determining your car’s negative equity means comparing your existing loan balance to the vehicle’s current value. To do this, get an estimated value of the vehicle from a site like Kelley Blue Book or NADAguides, and compare it to your lender’s 10-day repayment amount.
Stuck on the exchange conveyor belt?
If you are still rolling on negative equity on your auto loans, you may be on the trading treadmill. It is generally defined as a cycle of being underwater on your car loan and simply opting to roll that negative equity every time you buy.
It is also a cycle that is easy to fall into.
Because negative equity rollover means increasing the amount you need to borrow, it also means more interest charges and possibly longer loan terms to make monthly payments more affordable. Before you know it, you are having trouble paying off the loan quickly enough to deal with the depreciation of the vehicle (loss of value over time).
Anytime you renew negative equity, you are likely to start your next car loan in a negative equity position. again because you probably borrowed more than the value of the vehicle.
Getting off the trade-in treadmill can be as simple as waiting for your loan balance to catch up with your vehicle’s value. Staying up to date on your auto loan and keeping your vehicle in good condition can help you catch up, or even make extra payments when you can. Over time, your car’s depreciation also slows down if you maintain it.
Auto loans for bad credit and negative equity
Many borrowers with bad credit can find themselves in a negative equity situation if their interest rate is high, making it difficult to repay their loan quickly. Since your credit score is usually the most important factor in determining your interest rate, a borrower with credit problems may be more likely to have an underwater car loan due to interest charges and a high loan balance.
Fortunately, one of the best ways to improve your credit score is to acquire new credit that improves it. A car loan that is reported on your credit reports means that your timely payments are also reported. If you maintain a good payment history on your car loan, it could mean ending the loan with a better credit rating than you started with.
Subprime auto loans are reported to the credit bureaus and are generally intended for borrowers who are facing credit issues such as bankruptcy, no credit, situational bad credit, and other difficult credit situations.
If your current car loan isn’t helping you improve your credit score, it might be time to consider a subprime car loan that’s supposed to fix your credit. A higher credit score means a better chance of auto loan approval and qualifying for a better lower interest rate next time.
Need Auto Loan Resources?
TO Auto Express Credit, we know how difficult it can be for borrowers with credit problems to find a lender who can help them get the vehicle they need. And trying to find a lender can be time consuming – so let us help you!
We have developed a network of dealers from coast to coast who are registered with subprime lenders who specialize in helping borrowers facing unique credit situations. If you need a car loan and don’t know where to go, let us guide you. Fill out our completely free and non-binding auto loan application form. We will look for a dealer in your area who has signed up with lenders who can help you with unique credit challenges.