Car buying questions and answers related to negative equity, trading in your car, vehicle affordability, and credit score.
Just about every car dealer will accept negative equity. However, the best chance of rolling negative equity into a new vehicle loan is with a new car dealership on a vehicle with a generous manufacturer rebate. While most automobile manufacturers offer rebates from time to time several manufacturers continually offer rebates while others rarely offer rebates.
Negative Equity is defined as the difference between the loan payoff and the vehicle value. When you trade-in a car with negative equity the entire loan balance has to be paid off. The amount of negative equity is typically added, or rolled, into the new car loan. If the amount of the new car loan plus the negative equity exceeds the maximum the bank will finance, the car buyer has to make up the difference with a cash down payment.
There is not a published dollar amount of negative equity that they will finance. The amount of negative equity a bank will finance varies based on the credit score and disposable income of the car buyer as well as the value of the vehicle purchased.
Common LTV ratios based on credit score are:
| Credit Score | LTV Ratio |
|---|---|
| 781-850 | 1.30 |
| 661-780 | 1.25 |
| 601-660 | 1.20 |
| 501-600 | 1.15 |
| 300-500 | 1.10 |
| 0 | 1.05 |
The maximum payment a bank or auto finance lender will allow is based on the car buyers income. Most banks and auto finance companies approve car loans with Payment To Income (PTI) ratios below 12.5%. Car buyers with higher income qualify for a higher monthly payment. With a higher monthly payment the bank can finance more negative equity. Use our Car Affordability Calculator to estimate the purchase price you can afford based on income and negative equity.
Examples of Maximum Payment Based on Income:
| Monthly Income | Maximum Payment |
|---|---|
| $7,000 | $875 |
| $6,000 | $750 |
| $5,000 | $625 |
| $4,000 | $500 |
| $3,000 | $375 |
| $2,000 | $250 |
Banks will finance more negative equity when the vehicle purchased has a higher value. For example, $5,000 in negative equity will affect the LTV amount differently based on the value of the vehicle purchased.
Affect of $5,000 Negative Equity Based on the Vehicle Value:
| Vehicle Value | LTV Effect |
|---|---|
| $50,000 | 10% |
| $40,000 | 12.5% |
| $30,000 | 16.7% |
| $20,000 | 25% |
| $15,000 | 33% |
| $10,000 | 50% |
Yes, you can trade in a car you still owe money on as long as the loan on the vehicle trade-in is paid off in full. If the value of the trade-in exceeds the loan amount the difference can be used as a down payment or taken in cash. If, on the other hand, the loan amount exceeds the trade-in value the difference is rolled into the new loan as long as the amount does not exceed the lender’s LTV limit. When that is the case the difference would have to be paid in cash by the buyer.
Bad credit does not prohibit you from trading in a car you still owe money on, it may, however, limit the choices you have when selecting a new vehicle. If you owe more money on the trade-in than what it is worth the difference will have to be added to, or rolled in, the new loan. Lenders guidelines limit this amount based on the car buyer's credit score; the lower the score, the lower the amount that can be rolled over. For this reason, new vehicle with large manufacturer rebates work best for people with bad credit when they trade in a vehicle they still owe money on.
Yes, you can trade in a vehicle that is worth more than the vehicle you are buying. Taxation rules vary by state but in some states trading in a car that is worth more than the car you are buying results in zero tax liability. You will receive cash from the dealership totalling the amount of the difference between the value of the trade-in, less money owed to the bank, and the out the door price of the car you are buying.
Yes you can still sell a car you still owe money on. If you are selling and buying a vehicle from the same dealership the difference between what you owe and what the vehicle is worth can be rolled over to the new loan or used as a down payment if the value exceeds the money owed. When selling the vehicle directly to a dealership or private party the seller will either receive a check for the amount of positive equity or have to pay off the lender the amount of negative equity. Lenders will not release the Title Lien until the entire balance is paid.
A good rule of thumb is to keep your car payment below 12.5% of your gross monthly income. Our car affordability calculator based on income will give you a good idea of the price range to shop in to keep your payments below 12.5% of your income.
Many subprime lenders will approve new and used car loans for people with bad credit as long as the loan is below a 110% Loan to Value ratio. When calculating this ratio the invoice price is used for new cars and the average trade-in value is used for pre-owned vehicles. A good rule of thumb for people with bad credit is to have enough cash down to cover the Tax, Title, and License fees. Down payment requirements may increase when there is a trade-in with negative equity.
Yes. There are lenders and buy here pay here car lots that offer auto financing to people with credit scores below 500. Guidelines vary by lender but in most cases a person with a 500 credit score would have a higher interest rate and higher down payment requirement. There are many lead generating websites that advertise bad credit car loans with zero down; don’t be fooled by these sites, if you have a 500 credit score you will need a cash down payment.
The national average rates for Q3 2023 based on credit score are:
| Credit Score | New Car Rate | Used Car Rate |
|---|---|---|
| 781-850 | 5.61% | 7.43% |
| 661-780 | 6.88% | 9.33% |
| 601-660 | 9.29% | 13.53% |
| 501-600 | 11.86% | 18.39% |
| 300-500 | 14.17% | 21.18% |
| 0 | 19.95% | 25% |