I'm bored at work and haven't done much posting on here as of late so I thought I would bring this idea to the table, hopefully someone can shed some light. So the other day, a buddy of mine and I were talking about trading cars in. He said the one thing that is stopping him is the negative equity he has on the car, because if he doesn't pay it off, it will just keep adding up throughout vehicles that you trade in on. So we got to thinking about it, and we came up with an idea that to us, makes sense. However, I'm sure there is some sort of variable we are forgetting as this would be almost too easy and a way out of negative equity essentially without paying off the full loan amount or having the car totaled and using GAP insurance. So here is the idea below, sorry in advance if I don't explain this well;
In case you haven't had the misfortune of dealing with negative equity (seriously, good for you) because you pay your car off, how it works to my understanding through experience is that whatever amount you still owe after the trade in cost is deducted, gets applied to the cost of the vehicle you are trading in for.
We will use my camaro for example. Note that these aren't real numbers, but fictional ones used for the purpose of the explanation. Nice round numbers are easy to deal with haha. Say I owe $25,000 on my camaro still. The place I'm trying to trade it into deems that it is only worth $15,000. That's $10,000 negative equity (ouch). Instead of trading in towards a higher priced, better car that I want that costs $30,000, making it $40,000 with the negative equity tacked on, what if I did the opposite and aimed for the bottom of the barrel $2,000 beater on the lot. Apply the $10,000 negative equity to it and it's now $12,000. They are giving me $15,000 for the camaro, so hypothetically I should make $3,000 back and no longer have a loan with negative equity, right?
Question is, what am I missing? Because then instead of adding the $10,000 negative equity to the $30,000 car you want, you could take the beater car you traded for and the $3,000 you just made and use both toward a down payment on the $30,000 car, making the total of the new car now $27,000 (minus whatever the cost they give you for the beater) instead of making it the original $40,000 you would have with negative equity.
I'm sure there isn't a "loophole" in the system/an easy way out, I just can't think of what I'm missing so I'm asking you guys to help out
Also note there is no tax included in this, once again I used nice even numbers for the point of the post and to (hopefully) explain the idea thoroughly. Let me know what you guys think! Look forward to hearing your thoughts
