If you make it a habit to carry over debt each time you get a new car, it can end up being a very high debt load to carry. This situation is called ‘negative equity.’
If you are in this position, you will often find yourself in difficult situation if you discover that your new car is a lemon. For instance, you may file for a buy back, but the manufacturer will refuse to include paying back the negative equity from the previous vehicle that you traded in to get the new vehicle that is a lemon. Some states’ lemon law say the manufacturer must pay back the negative equity when it buys back a lemon, however, there are states that do not address this situation so the manufacturers say that they are not liable and will not include it in their buy back.
There are a number of ways you can avoid or get out of this position. The first thing you should do is to find out if you are actually in this financial situation. Some car dealers will try to increase their profits by undervaluing the car so they pay less for the trade in. It is important to know how much your vehicle is actually worth before you do a trade in. The Kelly Blue Book is a good source to finding out how much your vehicle is worth. You should then find out how much debt you have remaining on your current car loan so you will know if you are in a lower equity position. This will enable you to have better price negotiation advantage.
Most experts recommend that you pay off your existing vehicle before you purchase a new car, especially if you are in a state that has not implemented rules about manufacturers including negative equity when they buy back a lemon. If do not want to wait to pay off the current car, you can use any manufacturers cash incentives or rebates to pay the negative equity of the new loan, or pay off the current car’s loan. Other tips to preventing negative equity is to buy an inexpensive new car and get a short term financing, compare financing options so that you get a deal that you can manage. The Negative Equity dilemma can be difficult, however with a little planning, you will make sure that you can get out of the situation much easier and more quickly, and even keep yourself from getting in the situation in the first place.