Cars.com illustration by Paul Dolan

As the average length of a new-vehicle loan has increased to nearly six years, according to credit tracker Experian, so has the number of buyers who trade in a vehicle on which they owe more money than it’s worth. This is known as negative equity or being “upside down” on a vehicle. For example, if a car has a trade-in value of $10,000, but the owner still owes $14,000, the negative equity is $4,000. But what if you want to get rid of that vehicle? 

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Consumers who sign for a six- or seven-year loan may need a different vehicle or want to scratch that new-car itch before they pay off the loan. Frequently their vehicle will depreciate faster than they are paying off the loan balance, so they can be upside down for four years or longer, especially if they made a small down payment.

Being upside down, though, doesn’t preclude buying a new vehicle for someone who has sufficient income and a good credit record. Here’s an example of how it generally works:

If the trade-in vehicle has $4,000 of negative equity, the dealer will pay off that loan and roll the same amount into the loan for the new vehicle. That will increase your monthly payment, and you may be able to extend the length of the new loan to make the payment more affordable. Stretching out a loan means you will pay more interest and it will take longer to have positive equity, however

Some dealers may say they are “paying off” your current loan, as if there are no strings attached. If they don’t add that amount to the new loan, then they’re making it up elsewhere, such as in the price of the new vehicle or the value of the trade-in.

The biggest reason why it’s a bad idea to roll old debt into a new loan is this: You will be paying for two cars, including one that you no longer own.

Vehicle owners can contact their lender to find out how much they still owe, and before they go to a dealer they can estimate the value of their vehicle with the Cars.com used-car value tool.

In some cases, there are benefits to trading in an upside-down car. For example, if the current loan is at 8% interest and the new one is 4%, that will save money. Trading in an expensive vehicle for a cheaper one might also reduce the overall debt.

Financial advisers, though, say the best approach is to keep the current vehicle until it’s paid off or at least until it’s no longer upside down. A paid-off car is a down payment with no strings attached.

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