By Tamia Gallego
One weekend a couple, Mike and Jenny, went to a car dealership to explore their options about trading in their car. They were planning to expand their family and were looking to trade in their convertible for an SUV.
The couple disclosed that their car was on finance and they wanted to see what they could trade in their car for. While the couple were happily looking around at different car models, the salesman advised that the trade in value of this couple’s vehicle was worth less than the loan. The news came as a big surprise to Mike and Jenny as they had their car for just under two years.
Discovering you owe more on your vehicle than it’s worth happens to more people than you might think. When the value of your financed car is lower than the amount of your loan, this may make refinancing difficult.
So what should you do if you find yourself in this situation?
Determine the difference between what you owe on the car and it’s current market value. Check websites such as www.tradingpost.com.au, www.carsguide.com.au and use the calculators to determine the value of your car, selecting options and entering details according to your car’s features.
Once you know the value, subtract it from what you owe. The difference is the negative equity in your car. Bear in mind that this will only be a rough estimate, however, since the value of your car depends on many variables, such as your location and subjective judgments about the exact condition of your car.
Search for a new car that has a less expensive price tag. By trading for a less expensive car, you may be able to roll over the existing debt into a new loan with a loan amount that is effectively the same.
Explain your negative equity to the dealer to explore your options. Then apply for financing – either through the dealer or with your own lender. Because banks are reluctant to finance more than the value of a new purchase, they will insist on a cash payment to offset the negative equity in your vehicle being traded.
If you don’t have the additional money and can’t negotiate an ideal arrangement, consider keeping the car for longer and increase your monthly payments. As long as your loan doesn’t have early prepayment penalties, you can reduce your negative equity with higher payments, making it easier to trade in your car later down the track.
As with most debt agreements, think about the implications of your finances before signing a finance contract. Getting in over your head can take years to correct. You can avoid long-term financing and put down as much of an initial deposit as possible.
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