Negative car equity.
It sounds straight out of a George Carlin bit that makes fun about how we have softened the English language. Think of “Dish Machine Operator” and “Negative Cash Flow Position.” Another funny word that hides the true meaning of a car buying term is “Upside Down Car Loan.” All of the terms describe one fact of life: If you owe $20,000 on a car worth only $15,000, you have negative car equity. What does negative car equity, otherwise referred to as upside down car loan, mean and how does it influence a car dealership that pays off your trade in vehicle.
If you’re planning to buy a car soon, it’s vital that you have a clear picture on how car loans work to ensure that you can get the best value for your money. Even if you plan on doing business with established dealerships that are known to use the most complex automotive CRM, doing a little research is still important. This information will also help you determine the best car deals that won’t cause you to acquire lifelong of debts.
Four Truths about Negative Car Equity
Negative car equity features four indisputable truths. First, new cars frequently depreciate faster than the amount consumers can pay off auto loans. After one year, your brand new car will be worth 20% less than the amount you bought it for. Your car will continue to depreciate for 15-25% every year, which means that the longer you use your car, the lesser its value will be in the market.
Second, you borrowed money from a financial institution and you have to pay the lender back principal plus interest. It’s common for financial institutions to allow you to borrow money from them but keep in mind that the interest rates can increase over time. This is one of the reasons why you should calculate the total amount of your interest rates when applying for loans. You might be surprised how paying a loan for five years will require you to pay twice the amount of the money you’ve borrowed. Ideally, you should strive to apply for short-term loans and ensure that you can pay this as soon as possible to avoid acquiring high interest rates.
The third truth is something consumers can do to take proactive measures that diminish the financial impact of an upside down car loan. You have the power to improve the terms of a car loan or pay more than the minimum required each month to make your vehicle more attractive to a dealership as a trade-in.
Finally, you have control of maximizing the trade in value of your car by performing upgrades and maintenance. As long as you take care of your car properly and regularly, you’ll have better chances of maintaining the value of your car.
As the song goes “You’ve got the power.”
Beware of Advertising Promises
“We will take care of what you owe on a car loan.” This is just one of the many lines used by dealerships to convince interested buyers like you to do business with them.
It sounds too good to be true, and most likely, it is not true. However, straddling the fine line between truth and deception has never been the strong suit for many car dealerships. Auto dealerships rely on selling vehicles to remain thriving businesses and many dealerships stop at nothing to lure in unsuspecting consumers. This is why the Federal Trade Commission (FTC) devotes an entire section on its website to consumers who have negative car equity. The FTC warns consumers to be particularly wary of car dealerships that promote paying off car loans, no matter how much you owe.
Think about it: Name one dealership that would take on more debt and then issue debt to you that is less than the debt you owe on a trade in.
How Car Dealerships Deal with Upside Down Car Loans
If you want to trade in a vehicle that is worth less than what you owe on a car loan, you can expect an auto dealership to implement one or more financial strategies to recoup the money lost by paying off your car loan. One car dealership might insist you purchase a vehicle that is worth much more than what you owe on the trade in. For example, let’s say you owe 15 grand on a car worth $12,000. The dealer will want you to buy a vehicle worth more than $15,000. A second dealership might present financing terms that include a high interest rate that recovers the expense of assuming your negative car equity.
How to Deal with Negative Car Equity
Can you do anything to improve your “Negative Cash Flow Position?” Yes, you can.
The FTC recommends finding out what your car is worth, before negotiating the terms of a negative car equity trade in. Perform car value research by accessing the National Automobile Dealers Association (NADA) guide that addresses upside down car loans. You can also delay the purchase of a vehicle until you climb out of the negative car equity hole. The FTC suggests trying to sell the car to receive more than the vehicle’s wholesale value. Most importantly, carefully review the terms of a trade-in contract to discover how a dealership treats your negative car equity. Some dealers might sneak in fine print that adds hidden fees to cover an upside down car loan.
Doing your own research about the car you want to buy and its value in the market might delay your purchase but if it allows you to save money, you should still do it. A car is an expensive investment, and buying one from a dealership that charges you more than what you should pay can take a toll on your financial health.
If you experience a legal issue in your trade in transaction on a negative cash equity vehicle, the FTC acts as one option to prevent dealer fraud. You can also turn to your state Attorney General office for legal assistance. Remember that you are issuing a complaint, which means both government agencies will have to perform a meticulous investigation to determine the validity of your complaint.