Negative equity can be a common problem for many people who purchase vehicles. Basically, negative equity occurs when you owe more on the car than it is actually worth. This can happen for a few reasons. If you pay a high purchase price, you could be in negative equity from the very beginning of your loan. Even if you get a good deal, however, negative equity can occur for a number of reasons. With new cars, for example, a lot of value depreciation occurs in the first year or two of ownership of the car. High interest rates can also cause you to have negative equity.
If you have negative equity and are in need of another vehicle, you might be concerned about your options. For example, you might not be able to sell the car, since you won’t be able to cover the amount due on the loan. One option is to purchase another car and to roll your negative equity into the new vehicle loan, but this can be a bad idea. Then, not only will you be paying interest on the purchase price of your new car, but you’ll be paying interest on the remaining loan balance for a car that you no longer own. This can cause your monthly car payments to skyrocket.
Additionally, it can be tougher to get approved for a car loan when you have negative equity. If you have good credit, it might not be too much of a problem. If you have bad credit, however, it can be more difficult to get approved. This is because it can often be hard enough to get approved for a car loan when you don’t have good credit, and in order to get approved, you might have to put up a significant down payment and deal with high interest rates. In a situation where you are dealing with negative equity, you have to worry about finding a lender who will approve you for a higher loan amount for a loan that you won’t actually have enough collateral in your new vehicle to cover. Additionally, even if you do get approved, the higher interest rates can make the new car payments even higher than what someone who did the same thing but who had good credit would have to pay.
One option that you can look into in this situation, however, is leasing a car. Some consider leasing to be a good way to “hide” negative equity. It can be a good decision when you are in this situation because, since loan amounts are often lower on a leased car, your payments can still be somewhat reasonable, even when you are paying for the negative equity from your previous payment as a part of your lease payment. This also allows you to drive a new car for a couple of years without the long-term commitment of buying another car, so it can help you avoid a similar negative equity type of situation. The only downsides are that you will still be paying on a car that you no longer own, and you will technically not own a vehicle at all in this situation. Once your lease term runs out, you will have to return the leased vehicle.
As you can see, it is actually possible for you to lease a car when you have negative equity on an existing car loan. If you have found yourself in a negative equity situation, talking to someone at a dealership can help you find out more about this option and whether or not it is right for you.