How to Manage “Negative Equity”- Can you make it go away?

You want to get another vehicle and you hear those advertisements that say they can trade you out of your vehicle "no matter what you owe."

Is the dealer using magic to make your negative equity disappear? Do some dealers have options that others don't have? Is there a way you can avoid paying for your negative equity?

The answers are all no.

Your negative equity is your responsibility. It's the amount of money you owe on your loan that the vehicle is not covering. No matter how you slice it; it's your obligation.

There are only 3 ways to deal with negative equity.

First, you can wait and pay down your loan. As you make each payment - you'll be paying off your outstanding balance and eventually you won't owe more than the vehicle's value.

Second, you can use money to satisfy the obligation. Either money out of your pocket or money from the manufacturer if you're purchasing a new vehicle with a rebate. For instance, if you had $4,000 in negative equity, and the manufacturer had a $4,000 rebate - the rebate could be applied towards the negative equity when you trade your vehicle and you would be able to full satisfy your obligation.

Finally, you can add the negative equity to your next loan.  Remember, if you add it (also referred to as "rolling it over") it will raise your payment since you are borrowing more money. So if your goal was to lower your payment on your current vehicle and if you have negative equity - you might end up in the same place again if you trade out. Also, you cannot add an unlimited amount of negative equity to your next loan. Typically a vehicle can absorb 20% of its value - so you can add $4,000 to a $20,000 vehicle.  And finally, if you have challenges with your credit or income, you will have difficulty adding negative equity since you will be raising the amount of money you are borrowing and any down payment you have will be a smaller percentage of that new loan.

Remember the advertisement - "we can trade you out of your vehicle no matter how much you owe" - well the dealer who is saying that - is simply stating that they will work with you. But they will use one or more of the solutions above to manage your negative equity. No free rides.