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

Vehicles tend to depreciate at varying rates. Unfortunately, a car may depreciate so fast that its value may end up being less than what you owe for buying it. When you end up with no equity and owing more on your car loan than what you would get after selling it, the Consumer Financial Protection Bureau describes that as having a negative equity car loan, and that is not a good financial position to be in.

However, it’s not all doom and gloom concerning how you deal with negative equity on a car. There may be car dealerships that accept negative equity and allow you to roll it over into a used vehicle. Some financial institutions may also be willing to do that. But 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.

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. The CFPB describes it as the total vehicle loan value divided by its actual value.

Usually, 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.

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.

On the other hand, 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.

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.

Also, 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.

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 selling a car with negative equity or trading-in your vehicle.

In addition, 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.