1. What is Negative Equity in Car Loans?

Negative equity occurs when you owe more on your trade-in vehicle than it's worth. This "upside-down" situation means the difference gets added to your new car loan, increasing the amount you need to finance.

2. How Does the Calculator Work?

The calculator uses the equation:

Where:

• \( P \) — Effective loan principal
• \( price \) — Price of new vehicle
• \( tax \) — Sales tax on purchase
• \( fees \) — Additional fees (title, registration, etc.)
• \( D \) — Down payment
• \( trade\_value \) — Value of trade-in vehicle
• \( owed\_on\_trade \) — Amount still owed on trade-in

Explanation: The equation calculates the true amount being financed after accounting for trade-in equity (positive or negative) and down payment.

3. Importance of Calculating Effective Principal

Details: Understanding the effective principal helps borrowers know the true cost of their loan, especially when rolling negative equity into a new loan.

4. Using the Calculator

Tips: Enter all values in dollars without commas. Be sure to include all fees and taxes to get an accurate calculation of your loan amount.

5. Frequently Asked Questions (FAQ)

Q1: What exactly is negative equity?
A: Negative equity is when you owe more on your current vehicle loan than the vehicle is worth in trade-in value.

Q2: How does negative equity affect my new loan?
A: The difference between what you owe and the trade value gets added to your new loan amount, increasing both your principal and monthly payments.

Q3: Can I avoid rolling negative equity into a new loan?
A: Yes, by paying the difference out of pocket or negotiating a higher trade-in value.

Q4: Does this calculator include interest?
A: No, this calculates only the principal amount. Interest would be calculated separately based on your loan terms.

Q5: Is rolling negative equity into a new loan a good idea?
A: Generally not recommended as it increases your debt burden, but sometimes necessary if you need to replace your vehicle.