Trade-In Less than Debt Amount? Consider Your Options...

It has recently been reported in Automotive News, that nearly 30% of all new car buyers who walk into a dealer's showroom owe more on their existing vehicle than its trade-in value. This didn't used to be as common, but with incentives on the rise and low interest, long-term loans dominating the financial landscape, more people are finding themselves owing more on their vehicle loan than the actual value of their car.

Call it being "upside-down" or "underwater," but in a market that pushes the newest, latest car designs, more people than ever are inspired to get into a new car—whatever it takes. Others simply don't feel comfortable driving a car that is out of warranty or one with too many miles on the odometer. Whatever the reason, the fact remains that dealers and financial organizations across the country are willing to accommodate these purchases by making deals that "rollover" the debt owed from the trade-in to the new car with a higher loan amount over a longer period of time. This is done to keep the monthly price low enough to be affordable.

Why is this so common?
The combination of hefty incentives, smaller down payments and the general willingness on both financial and dealer organizations' parts to create "rollover" loans, have influenced the car market to accommodate lenders' needs and find creative solutions to getting buyers into new vehicles. Some of these methods are less desirable than others—but ultimately, it's a personal financial decision a car buyer must make before taking the "plunge."

Understand Your Position
Don't know if you're in this situation? To find out, simply look up the trade-in value of your current vehicle—be sure to rate your vehicle's condition by selecting the "rate it" link on the pricing pages. If your trade-in value is less than the balance of your current car loan, you are "upside-down" by that amount after the trade-in. Check out your car's private party amount. Is it still less than your debt? If not, you may want to try selling it yourself.

Understand Your Options
If you find yourself in this position, you have several options—each with benefits and risks attached:

Option #1: Rollover the existing debt to a new car loan.

Benefit:
The biggest benefit to choosing this option is that you will be able to drive that new car off the lot, possibly for a comparable monthly payment.

Risk:
You will probably be asked to finance a long-term loan, which means you will owe more than the new car is worth for an even longer period of time.

Option #2: Find a new car with an incentive amount that covers your debt.

Benefit:
This finance "trick" is great for covering the amount of your trade-in debt and will eliminate the "rollover" effect.

Risk:
Remember that most incentivized vehicles take the resale value out of the car up-front. In other words, you'll find these car's values drop faster than other cars that do not have incentive, thus placing you in a similar "upside-down" position later. NOTE: This is still less risky than Option #1 because in this case, the manufacturer has absorbed part or all of the negative balance.

Option #3: Keep the car you have until its value catches up.

Benefit:
The obvious benefit here is that you will have equity to work with when you're ready to look for a new car.

Risk:
The only risk is that your car could have excessive miles and damage, reducing the amount you have to barter with.

Option #4: Refinance your existing car with a shorter-term loan.

Benefit:
Third-party financial companies, like Bank of America, offer refinancing loans that could speed up the time it takes to get your loan healthy.

Risk:
You risk missing out on getting those new wheels, of course, but you may also find yourself outside of warranty coverage and putting too many miles on your car to best hold its value.

As you can see, both consumers and dealers are coming up with highly creative ways to deal with this growing issue. The biggest danger is that rising interest rates—even as small as 1 percent—could equate to an average increase of $700 over the life of the loan. With loans currently being financed for terms as long as 96 months (8 years), this is a scary proposition that could negatively affect your personal financial health.

Avoid Being Upside-Down Again
Finally, here is some general advice on things you could do before you pursue your next car purchase:

• Educate yourself on your credit score —don't pay a higher interest rate than you need to.
• Educate yourself on available interest rates in the marketplace before applying for a loan—know a good rate when you see one.
• Do plenty of pricing research on available new car and trade-in values to get a good value on both transactions.
• Match your loan to your expected ownership length of time—a longer loan will help keep monthly payments low, but chances are it will lead to being upside down when the time comes to trade it in for a new car.

If getting a new car is a high enough priority, there are means to that end. Just remember, along with 30% of other car buyers, it's harder to get right-side up from an upside-down position.