Negative equity means owing a lender more than an asset, like your car, is worth. While you are working on paying off your car loan, and ideally before you commit to the loan terms in the first place, you should understand how to avoid and deal with negative car equity. 
When It’s an Issue
Negative equity in your car is not always an issue. You don’t need to worry about negative car equity if your plan is to pay back the loan and keep the car indefinitely. Aside from knowing you paid more than your car is worth, nothing bad is going to happen. You can also build up enough equity in the car, as it is paid off, so that the negative equity is offset.
However, if you want the option of trading in your car before the loan is repaid you risk losing money.
Pay the Loan
To avoid losing money by trading in a car with negative equity you can pay off the remainder of your car loan in full before buying a new used vehicle. This can be accomplished either through selling the used car in a private sale for more than its trade in value or by dipping into your savings. You can also accelerate the repayment schedule, instead of paying off the entire remaining loan, which will reduce how much interest you pay over time. Lowering the interest can increase the chances of eventually owning positive equity in your car.
Trade in Concerns
The only way a dealership can legally roll negative equity into a new trade in loan is to increase the asking price for the new car. For example, if the car being traded in is worth $2000 and you have $3000 in negative equity, the dealership can raise the asking price of the new car by $3000 and declare the trade in worth $5000. This is complicated, but perfectly legal. Carefully review the fees being charge in this kind of deal to ensure the final sales contract and financing coincide with what you were offered.
The New Loan
After dealing with a negative car equity dilemma and finally getting your new car, try to keep the length of your new loan as short as you can manage. A shorter loan will allow you to pay off the debt before the car depreciates below the final price tag.
Negative equity is owing your lender more than your car is currently worth and can prevent you from getting the new trade in you desire. Pay your auto loan back quickly to avoid allowing the debt to become “upside down.”
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