Lesson 13 of 25 · 7 min

What happens when negative equity is rolled into the next loan

The gap from the last car is new principal on the next one, so the asset and the claim start unmatched.

Rolling negative equity, writing the leftover claim from one car into the principal of the next, raises the new loan by the old gap. The new car does not get larger. The new principal does. Day one of the next loan therefore starts with a claim that already exceeds the new cash price, or sits closer to it than the down payment implies.

Marlow Street Garage takes in a car with an old balance of $18,420 and a trade allowance of $14,200, the amount the dealer credits against the old loan. The rolled gap is $18,420 − $14,200 = $4,220. The new cash price is $29,680. A down payment of $1,500 would have financed $29,680 − $1,500 = $28,180 on a clean book. With the roll, financed amount is $29,680 − $1,500 + $4,220 = $32,400.

At an illustrative 8.15 percent for 72 months, the rolled installment is $570.45. The clean installment on $28,180 is $496.15. Extra is $74.30 a month. Over 72 months that extra is $5,349.58 — the $4,220 gap plus $1,129.58 of interest the gap accrues. Track 6 lesson 1 is the second-draw arithmetic on a securities line: increasing a draw after collateral has already moved. Rolling a car gap is that second draw, except the new collateral is a different car and the extra draw is the leftover from the last one.

The next lesson puts $32,400 over $29,680 as day-one LTV. This one is the addition. Old gap plus new principal is a larger loan on a car that was never that expensive.

The $4,220 did not buy any of the new car. It bought the retirement of the last one. It still sits in the new principal, accruing.

Key terms

Trade allowance: The amount credited against the old loan when the old car is taken in. Not always equal to the mark.
Rolled gap: Old balance minus trade allowance. The leftover written into the next principal.
Clean principal: What the new loan would have been without the roll: new cash price minus down payment.

Worked example

A $4,220 gap becomes $32,400 of principal

Marlow Street Garage. Old balance $18,420, trade allowance $14,200. New cash price $29,680, down $1,500. Illustrative 8.15 percent, 72 months.

Rolled gap: $4,220
Clean principal: $28,180
Financed after the roll: $32,400
Rolled installment: $570.45
Clean installment: $496.15
Extra over the life: $5,349.58

The new car costs $29,680. The new loan is $32,400. The $4,220 difference is the last car's leftover, now accruing at 8.15 percent.

Check yourself

Old balance $12,260, trade allowance $9,800. New cash price $24,680, down $2,000. Illustrative 7.9 percent, 60 months. What is the rolled principal, the rolled installment, and the extra over the life versus a clean loan?

Rolling negative equity is the everyday version of increasing a draw after collateral has already fallen, the second-draw arithmetic Track 6 lesson 1 works. Open Why the second loan feels safer than the first →

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.