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

by Shanan Miller ; Updated July 27, 2017

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.

About the Author

Shanan Miller covers automotive and insurance topics for various websites, blogs and dealerships. She has extensive automotive experience, including auction, insurance, finance, service and management positions. Miller has worked for dealer sales events around the United States and now stays local as a sales and leasing consultant for a dealership.