How Much Negative Equity Can You Roll Into a Lease?
Rolling negative equity into a new lease is a complex issue with no single, universally applicable answer. The amount you can roll over depends on several factors, and it's crucial to understand these before making any decisions. This guide will help you navigate this process and understand what to expect.
What is Negative Equity?
Before delving into how much negative equity can be rolled over, let's clarify what it is. Negative equity, also known as being "underwater" on your loan, means you owe more on your vehicle than it's currently worth. This happens when the car depreciates faster than your loan is paid down.
Factors Affecting How Much Negative Equity Can Be Rolled Into a Lease:
Several factors influence how much, if any, negative equity a dealership will allow you to roll into a new lease:
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The Dealership: Each dealership has its own policies and lending partners. Some are more lenient than others when it comes to accepting negative equity. Their willingness often depends on the vehicle you're leasing and the overall financial picture.
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Your Credit Score: A higher credit score improves your chances of getting approved for a lease with rolled-over negative equity. Lenders view higher scores as lower risk.
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The Value of Your Trade-in: The trade-in value of your current vehicle directly impacts the amount of negative equity you have. A higher trade-in value reduces the amount of negative equity you need to roll over.
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The Lease Terms: The length and terms of your new lease will influence the lender's decision. A longer lease term might make them more comfortable with absorbing some negative equity.
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The New Vehicle's Price: The cost of the new vehicle plays a significant role. A more expensive vehicle might require a larger down payment or a higher monthly payment to compensate for the rolled-over negative equity.
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The Lender's Policies: The lender, whether it's the dealership's captive finance company or an external lender, ultimately sets the limits on how much negative equity they're willing to approve.
Can I Roll All My Negative Equity Into a New Lease?
No, you almost certainly cannot roll all your negative equity into a new lease. Lenders typically have limits on the amount they'll allow, often capped at a certain percentage of the new vehicle's price. Trying to roll over an excessive amount will likely result in rejection.
What Happens if I Roll Over Negative Equity?
Rolling over negative equity essentially adds it to the principal balance of your new lease. This means:
- Higher Monthly Payments: Your monthly lease payments will be higher to account for the additional debt.
- Longer Lease Term: You might be offered a longer lease term to manage the higher principal, resulting in paying more interest over time.
- Increased Total Cost: Your total cost of owning the vehicle will be significantly more than if you had handled the negative equity differently.
What are the Alternatives to Rolling Over Negative Equity?
Before accepting a lease with rolled-over negative equity, consider these alternatives:
- Sell your current vehicle privately: You may be able to get a better price selling privately, reducing or eliminating your negative equity.
- Pay down the negative equity: If possible, pay down some or all of the negative equity before leasing a new vehicle.
- Explore different financing options: Investigate other leasing or financing options to see if you can find a better deal.
How Can I Determine How Much Negative Equity I Have?
You can usually get an estimate of your vehicle's trade-in value from online resources like Kelley Blue Book (KBB) or Edmunds. Compare this value to your outstanding loan balance to determine your negative equity. Your lender can also provide you with your exact loan balance.
In Conclusion:
While rolling negative equity into a new lease is possible, it's a significant financial decision with potentially long-term implications. Carefully weigh the pros and cons, explore alternatives, and thoroughly understand the terms of any lease agreement before committing. It's highly recommended to consult with a financial advisor to determine the best course of action for your specific situation. Always shop around and compare offers from multiple dealerships and lenders to find the most favorable terms.
