How negative equity changes a new car loan

When a trade-in is worth less than its loan payoff, the gap doesn't disappear. A dealer can pay off the old loan and add the shortfall to the new one, which means you are financing two things: the new car and the remainder of the old one.

Formula

Negative equity = max(Payoff − Trade value, 0)

Amount financed = Price + Sales tax + Fees + Negative equity − Cash down

Loan-to-price = Amount financed ÷ Vehicle price

Worked example

Owing $17,000 on a car worth $12,000 leaves $5,000 of negative equity. Buying a $30,000 car with $2,000 down, 6% tax and $800 of fees finances about $35,600 — a loan-to-price of 119%. At 8% over 72 months the payment is roughly $624, about $88 more per month than without the old balance.

What the result means

A higher loan-to-price means it takes longer for the loan balance to fall below the car's value. Long terms keep payments lower but slow that process, which is how negative equity can carry from one car to the next.

Assumptions and limitations

• Trade value and payoff are your estimates; get a dealer appraisal and a lender payoff quote.
• Tax, fee and trade-in rules vary by state and locality. Lender limits on rolled-in debt are not modeled.
• This is an educational estimate, not advice on whether to buy, refinance or wait.

Try the trade-in payment calculator to toggle the trade-in tax credit, the affordability calculator to compare the payment with your income, or the true cost of ownership calculator for the full picture.