Trading in a Car That Has Negative Equity in Ontario

If you’re thinking about trading in your car, but you owe more on your loan than the car’s current value, you’re dealing with what’s called negative equity. This can make the process of trading in your vehicle a bit tricky, but it’s still possible.

 

Let's break down what it means to trade in a car with negative equity, what your options are, and how it works, especially if you’re in Ontario and looking to trade your car at a dealership.

 

 

What is Negative Equity?

Negative equity happens when the amount you owe on your car loan is higher than the current value of your car. For example, if you owe $20,000 on your car loan, but the car is only worth $15,000, you have $5,000 in negative equity.

 

This is sometimes referred to as being "upside down" or "underwater" on your loan.

 

Why Do Cars Have Negative Equity?

Cars naturally lose value over time because of depreciation. A new car loses value the moment you drive it off the lot, and the value continues to drop each year.

 

If your car loan term is long or if you made a small down payment, you might find yourself in a situation where your car's value is less than the remaining balance on your loan.

 

Trading in a Car with Negative Equity in Ontario

If you want to trade in a car with negative equity in Ontario, it’s important to understand how dealerships handle this situation. Here’s a breakdown of what happens:

 

Determine the Trade-In Value

The dealership will assess your car’s trade-in value. This is what they are willing to pay for your current car. If your car’s trade-in value is less than what you owe, you’re dealing with negative equity.

 

Covering the Difference

The negative equity doesn’t just disappear when you trade in your car. You have two main options to deal with the difference:

 

• Pay the Difference Upfront: One option is to pay off the negative equity out of pocket when you trade in your car. If you owe $5,000 more than your car is worth, you would need to pay that $5,000 to settle your current loan.

 

• Roll the Negative Equity into a New Loan: Another option is to roll the negative equity into your new car loan. This means the dealership adds the remaining debt from your old car loan to your new car loan. Keep in mind, this will increase the amount you owe on your new loan and might result in higher monthly payments.

 

How Rolling Over Negative Equity Works

Let’s say you want to trade in your car, and you owe $20,000 on it. The dealership offers you a trade-in value of $15,000, which means you have $5,000 of negative equity. If you decide to roll this negative equity into a new car loan, here’s how it might look:

 

• The price of the new car is $30,000.
• You add the $5,000 of negative equity from your old car loan.
• Now, your new loan amount is $35,000 instead of just $30,000.

 

While this might seem like an easy solution, it’s important to note that by rolling over negative equity, you could be starting your new loan upside down again. You’ll owe more than the car is worth right from the start, which can make it harder to build equity in your new car.

 

Is Trading in a Car with Negative Equity a Good Idea?

Whether trading in a car with negative equity is a good idea depends on your financial situation. Here are a few things to consider:

 

• Can You Afford the New Payments?: Rolling negative equity into a new loan can result in higher monthly payments. Make sure these payments fit within your budget.

 

• Interest Rates: If you can get a lower interest rate on your new loan, it might help offset the cost of rolling over negative equity. Dealerships in Ontario often offer promotions like zero percent car financing, but these deals are typically available only to buyers with good credit. If you have poor credit, you might end up with a higher interest rate, which will make the cost of rolling over negative equity even more expensive.

 

• How Long Will You Keep the New Car?: If you plan to keep the new car for a long time, you may eventually build positive equity. However, if you trade in the new car again in a few years, you could find yourself in a negative equity situation once more.

 

Alternatives to Trading in a Car with Negative Equity

If you’re concerned about the impact of negative equity, here are a few alternatives to consider:

 

• Wait and Pay Down Your Loan: If possible, consider waiting until you’ve paid off more of your current loan or until your car’s value has increased. This can help reduce or eliminate the negative equity.

 

• Sell the Car Privately: Sometimes, you might get a better price for your car if you sell it privately rather than trading it in at a dealership. This could help you cover more of the loan balance and reduce the negative equity.

 

• Refinance Your Loan: You might be able to refinance your current car loan to get a lower interest rate or better terms. This could help you pay off the loan more quickly and reduce the amount of negative equity.

 

Whether you choose to pay off the negative equity upfront or roll it into a new loan, it’s important to carefully consider your financial situation and make a choice that works best for your budget and long-term goals.