How Much Negative Equity Can Be Financed in a Used Car?

The amount of negative equity a borrower can roll over into a used car loan differs by individual credit history and lender-determined vehicle value. Some borrowers might be able to roll over thousands of dollars into a used car loan, while others might have trouble financing the cost of a used car without providing a down payment to increase vehicle equity.

Credit

Your credit history sets the terms of your loan. Excellent credit borrowers might obtain an approval for up to 120 percent of a vehicle's value, while poor credit applicants might obtain an approval for as little as 60 percent of a vehicle's value. This percentage is called a loan-to-value ratio. Your potential lender reviews your credit history to determine your lending risk. The higher your credit risk, the less you'll be able to borrow. A history of late payments, unpaid accounts, judgments or tax liens significantly decreases your chances of financing negative equity.

Car Pricing

The price you pay for a used car also affects your loan-to-value ratio. If you purchase a $15,000 vehicle with an $18,000 lending value, you might be able to roll over $3,000 in negative equity to your new loan if you secured a loan with a 100 percent loan-to-value ratio. If the same vehicle cost $19,000, you'd have to provide a down payment of $1,000 to meet the lender's loan requirement of $18,000, or 100 percent of the lender-determined value.

Solutions

Shop for a car with a higher lending value than sales price. Some vehicles, such as rental cars, usually have a high lending value and reduced price. Large used car dealers often sell rental cars. Consider working with a dealer to carry over negative equity if you can't obtain an approval on your own. A knowledgeable dealer can show you vehicles in its inventory that have a higher lending value than sales price. A dealer who uses outside financing might also match you with a lender who offers a higher loan-to-value ratio based on your individual credit.

Warning

The excess money you finance into a new loan doesn't disappear. If you can't provide a down payment to cover your old vehicle's excess balance, your negative equity will become an issue again when you try to sell or trade-in your vehicle. Don't extend your loan term to decrease your monthly payment, as you'll end up paying more in interest. If you can't afford the payment of a 60-month loan, consider paying down your current loan to minimize negative equity or consider saving money for a down payment instead.