How to Trade a Car When You Owe More Than Book Value

A car loses value the minute you drive it off the dealer's lot. If you financed the whole cost rather than putting down a large down-payment, you might one day find that you owe more than the car is actually worth. Hopefully, you'll be able to keep it long enough for your payments to offset the loss. If you have to trade it before that happens, you'll be "upside down" on your loan and will face some special challenges. You can trade the car in, but be prepared to add additional debt to the new loan.

Instructions

1

Pay down your car loan before you do the trade-in so you no longer owe more than book value. If you have good credit, you might be able to get a home equity line of credit or other low interest loan. By using this to pay down your existing car loan, you'll avoid rolling that debt into a new car loan with a higher interest rate.

2

Buy the least expensive car possible. If you can't pay down your existing car loan before you do your trade-in, make sure the car you are buying is cheap. The upside-down amount on your existing loan will be added to the new loan, and as soon as you drive that new car off the lot you'll be upside down on that amount, too. The cheaper the new car, the less additional debt you will incur.

3

Get the new loan on your own, if possible, rather than letting the car dealer handle it. Car dealers sometimes take advantage of buyers who are upside down on their current loan, especially if their credit isn't perfect. Talk to your bank or credit union and try to arrange your loan upfront. If the dealer can offer a better interest rate, you can take it. If not, you can stick with your self-arranged loan.

4

Try to refinance the loan at a lower interest rate after the sale if you can't get a good rate beforehand. Once the transaction is complete and you have your new car (as well as a loan for much more than it is worth), you can take your time shopping for a loan with more favorable terms. You will need good credit to do this, since the car is not sufficient as security. You might be able to use a home equity loan. If you have CDs or other money in the bank, you might be able to use those as security for the new, lower-interest loan.