You’ve found the next car.
You’ve spoken to the dealer about trading your current vehicle.
Then the numbers come back.
Your current finance payout is higher than what the dealer is prepared to give you for the car.
Maybe your payout is $32,000 and the trade-in offer is $26,000.
That leaves a $6,000 shortfall.
The first question is usually:
Can I still change cars?
Potentially, yes.
Owing more on your current vehicle than it is worth doesn’t automatically prevent you from buying another car.
But the shortfall doesn’t disappear when you trade the vehicle.
It needs to be dealt with as part of the overall purchase and finance.
If you’re looking at changing cars in Parramatta or elsewhere in Australia, understanding these numbers before committing to the replacement vehicle can make a significant difference.
Start With the Current Finance Payout
Before deciding whether you have equity or a shortfall, you need an up-to-date payout figure for your existing car finance.
The payout is the amount required to clear the finance at that point in time.
It may not be exactly the same as the balance you remember seeing on a statement or online account.
If you’re considering changing vehicles, obtain a current payout figure from your financier.
Then compare it with what your current vehicle is realistically worth.
For example:
Current finance payout: $32,000
Trade-in value: $26,000
Shortfall: $6,000
That $6,000 is the amount that still needs to be dealt with when the existing vehicle and finance are cleared.
What Is Negative Equity?
When the amount required to pay out your car finance is higher than the value of the vehicle, you are generally described as having negative equity.
For example:
Your car is worth $25,000.
Your finance payout is $30,000.
You have a $5,000 shortfall.
The opposite can also occur.
If your vehicle is worth $30,000 and your payout is $24,000, there is $6,000 of equity.
That equity may be available to contribute towards the replacement vehicle.
Knowing which position you are in is important before you start working out how much you need to finance next.
Why Does Negative Equity Happen?
There are many reasons a customer may owe more than the current value of their vehicle.
The vehicle may have depreciated faster than the finance balance reduced.
The original finance may have had a longer term.
A balloon payment may form part of the loan structure.
The customer may have changed vehicles relatively early in the finance term.
The original purchase may have included other amounts that increased the total financed.
Market values for that particular vehicle may have changed.
Or the vehicle may simply be worth less than expected when it comes time to trade.
Negative equity isn’t necessarily evidence that something has gone wrong.
But once you know it exists, it needs to be included in the conversation about the next purchase.
Can the Shortfall Be Added to the Next Car Loan?
Potentially, in some circumstances.
But it should never be assumed that a lender will simply add whatever shortfall exists to the next loan.
The lender will consider the complete application.
That may include your financial position, the replacement vehicle, the purchase price, the amount being requested and the lender’s own requirements.
The proposed finance might look quite different depending on whether the shortfall is $2,000, $8,000 or $20,000.
The value of the replacement vehicle can matter as well.
This is why it is useful to know your current payout and trade value before committing to the next car.
What Does the New Finance Actually Need to Cover?
Imagine you want to buy a replacement vehicle for $45,000.
Your current vehicle is being traded for $25,000.
But the payout on the existing finance is $30,000.
There is a $5,000 shortfall.
If you aren’t contributing cash, the proposed finance may need to account for more than the $45,000 purchase price of the replacement vehicle.
That doesn’t automatically mean a lender will agree to finance the entire amount.
It simply shows why looking only at the sticker price of the next car can give you an incomplete picture.
The existing vehicle position forms part of the transaction too.
What if I Have Cash to Cover the Shortfall?
That can change the position.
Using the same example, suppose there is a $5,000 shortfall between the trade-in value and the existing finance payout.
If you contribute $5,000 to clear that shortfall, you may avoid needing to ask a lender to consider it as part of the replacement finance.
Or you may decide to contribute only part of the shortfall.
What makes sense will depend on your circumstances, how much cash you have available and what else you need that money for.
Having savings doesn’t automatically mean using all of them towards the car is the right answer.
The important thing is understanding the numbers before deciding.
What if I Don’t Have Cash to Cover It?
Tell Thrive Broking.
Don’t assume the answer is automatically no.
And don’t assume the entire shortfall can automatically be financed either.
We need to understand the amount involved, the replacement vehicle and your overall circumstances.
There may be situations where a lender is prepared to consider a structure involving some negative equity.
There may be situations where a cash contribution is required.
And there may be situations where changing the replacement vehicle or purchase price gives you a more workable position.
The answer comes from looking at the complete transaction.
Could Choosing a Cheaper Replacement Car Help?
Potentially.
Suppose you have a $7,000 shortfall on your existing vehicle.
You were planning to replace it with a $55,000 car.
Before proceeding, it may be worth looking at what the transaction would look like with a $45,000 vehicle instead.
That doesn’t mean the cheaper car will automatically solve the issue.
But changing the purchase price can change the amount of finance required and the overall position being considered.
This is why understanding your existing finance before choosing the replacement vehicle can be useful.
You can make the car decision with the actual numbers in front of you.
What if the Dealer Offers More for My Trade?
A higher trade-in value can reduce the shortfall.
But look at the complete purchase, not just the trade-in number.
For example, one dealership may appear to offer substantially more for your trade while providing less movement on the price of the replacement vehicle.
Another may offer a lower trade value but a different overall purchase price.
The important number is not simply:
“How much are they giving me for my trade?”
You need to understand the complete changeover position.
What is the replacement car costing?
What is the trade worth?
What is the existing payout?
How much cash are you contributing?
How much finance will actually be required?
Those numbers together tell you much more than the trade-in figure on its own.
What if I Sell the Car Privately Instead of Trading It?
A private sale may produce a different sale price from a dealership trade-in.
If you can sell the vehicle for more, that may reduce or potentially eliminate the shortfall.
But if finance is still secured against the car, the existing loan still needs to be dealt with appropriately.
For example, suppose:
Finance payout: $30,000
Dealer trade-in offer: $24,000
That leaves a $6,000 shortfall.
If you can genuinely sell the car privately for $28,000 instead, the shortfall may reduce to $2,000.
That is a materially different position.
However, a private sale involves its own practical considerations, including finding a buyer and dealing appropriately with the existing finance.
Don’t simply accept money from a buyer and assume you can sort the secured finance out later.
Should I Wait Until I Have More Equity?
That can be worth considering.
If you don’t need to replace the car immediately, keeping the existing vehicle for longer may allow the finance balance to reduce.
But vehicle values can also change.
So waiting doesn’t guarantee that a shortfall will disappear by a particular date.
The useful question is whether you need to change the vehicle now and, if not, what your position may look like if you wait.
If the current car still suits your needs, there may be value in understanding the numbers before making the decision to replace it.
What if I Need to Change Cars Now?
Sometimes waiting isn’t practical.
Your family may have outgrown the vehicle.
Your work requirements may have changed.
The current car may no longer suit the driving you do.
Or you may simply need a more reliable vehicle.
If you need to change cars while you have negative equity, start with the actual numbers.
Get the payout.
Establish a realistic value for the current car.
Work out what you are considering buying.
Tell us whether you have cash available to contribute.
Then Thrive Broking can look at the transaction as a whole rather than treating the new car and old finance as two unrelated issues.
Does My Income Still Matter if the Car Is Good Security?
Yes.
The vehicle is only part of the finance assessment.
The lender may also consider your income, employment, housing position, existing commitments, living expenses, credit history and other relevant information.
Having a replacement vehicle that meets a lender’s requirements does not remove the need for the applicant to meet the lender’s requirements as well.
This becomes particularly important when the proposed amount financed is higher because an existing shortfall also needs to be considered.
What About My Credit Cards and Other Loans?
They can matter.
When you’re thinking about a car purchase, it is easy to focus only on the existing car loan.
But a lender may also need to consider your other financial commitments.
That can include personal loans, credit cards and other liabilities.
Even a credit card with little or nothing currently owing may still be relevant because the credit limit represents available debt.
Don’t decide for yourself that a commitment is too small to mention.
Give Thrive Broking the complete picture and let us work with the information accurately.
Could a Deposit on the New Car Help?
A cash contribution can reduce the amount that needs to be financed.
But whether it solves a negative-equity issue depends on the numbers.
For example, if you have a $6,000 shortfall and contribute $10,000 cash, some of that contribution may effectively deal with the shortfall while the remainder reduces the amount required for the replacement vehicle.
If the shortfall is much larger, the position may look different.
This is why the useful question isn’t simply:
“Do I need a deposit?”
It is:
“What does the entire changeover look like once the old finance, trade value, new vehicle and my cash contribution are all included?”
Don’t Forget the Payout Can Change
If you obtained a payout several weeks ago, don’t assume it is still the exact amount required today.
When you’re ready to proceed with the replacement purchase, an up-to-date payout may be required.
The timing and process for clearing the existing finance can also depend on the transaction.
If you’re trading through a dealership, the trade and payout may form part of the settlement arrangements.
If you’re selling privately, the process can be different.
Tell Thrive Broking how you’re disposing of the existing vehicle so we can understand the complete purchase.
This Is Why We Ask About the Existing Car Early
If you’re changing vehicles, one of the first things Thrive Broking will want to know is whether you currently have a car and whether finance is still owing on it.
We’re not asking because an existing loan automatically creates a problem.
We’re asking because it changes the numbers.
If the current car has $10,000 of equity, that may help fund the replacement purchase.
If it has a $10,000 shortfall, that needs to be considered.
Those are two completely different finance positions.
The earlier we know which one applies, the more accurately we can understand what you’re trying to do.
Changing Cars in Parramatta?
If you’re in Parramatta and thinking about replacing a vehicle that still has finance owing, Thrive Broking can help you work through the numbers.
Start with your current finance payout and the value or trade-in offer for your existing vehicle.
Then tell us what you’re looking to buy.
If there’s a shortfall, we’ll want to understand how much it is, whether you’re contributing cash and what the replacement purchase looks like.
Thrive Broking assists customers across Australia by phone and online, so the same applies whether you’re buying locally in Parramatta or have found the replacement vehicle somewhere else.
Before You Commit to the Replacement Car
If your trade-in is worth less than your finance payout, don’t panic.
But don’t ignore the shortfall either.
Find out exactly what you owe.
Find out what the vehicle is realistically worth.
Then look at the next purchase with those numbers included.
You may still be able to change cars.
The important thing is understanding the complete position before you commit.
If you’ve found the replacement vehicle already, send Thrive Broking the details.
If you’re still deciding what to buy, tell us what you’re considering.
We’ll start with the current payout, the vehicle value and what you’re trying to achieve from the change.