Thread: Negative Equity

I posted this in the General Talk forum as well, but thought I could get more responses here. Has anyone gotten out of a bad car loan with negative equity. If so, how? (I know paying it off is an option, but I was thinking about a trade). If you were able to trade up, did you have to come up with the cash for the negative equity, and how deep was your negative equity. I'm looking at 2800 dollars plus:(

Originally posted by Newcomer
I posted this in the General Talk forum as well, but thought I could get more responses here. Has anyone gotten out of a bad car loan with negative equity. If so, how? (I know paying it off is an option, but I was thinking about a trade). If you were able to trade up, did you have to come up with the cash for the negative equity, and how deep was your negative equity. I'm looking at 2800 dollars plus:(

Here is the magic word to look for: REBATE. When a dealer has "factory incentives," that gives him leeway to help get you out of your negative-equity situation, since the lenders will still loan close to the "retail" price. Plus, a lot of times the dealer will add an extra discount to the factory incentive and call it a rebate. For example, if a dealer is getting $1000.00 factory incentive on a certain model, he'll add another $1000.00 discount and call it a $2000.00 rebate. I once saw a situation where the Eagle Premier (Chrysler) had a total of $3500.00 rebate. Look for the commercials with "Cash Back" deals and that will be a good place to start. Good luck!

I owed $6k on a 94 Civic EX with 216mi. My trade was worth $2k and I was able to roll over $4k into another loan. Then my CU gave me $22k for the purchse of my new vehicle.

Check with your bank or CU. They may be able to help you.

Keep your eyes and ears open for dealer specials that say something like "we'll give you $3000 more than your trade is worth" Now is the time of year to watch out for these kind of deals, since the new 2002 models are out soon, dealers use these kind of incentives to clear out inventory. A dealer here in the Columbus area is doing it right now.

Struggler and Tiff,

These are great suggestions. I never thought of rebates/incentives as a way to overcome the neg. equity. I have about $1200 in neg. equity on my car - and short of putting the neg. equity on a credit card, I was just going to eat it (as my last sub-prime lesson in personal finance) and pray that I not end up in a car accident before pay-off.


One question: Do rebates/incentives only work for brand new cars or do some dealerships offer these on one year old or dealer cars?

Your idea sounds great - but I cringe at the prospect of losing 20% value when I sign the contract for a new car --- doesn't buying a new car inherently create negative equity (unless there's a rock bottom interest rate)?



Thanks,

I posted a lot about this about a week ago. I will try to find the link to my old post and re-post it.

My family owns dealerships (13 new and several more used). I spent the majority of my life in that business, so I know my way around a bit.

Negative equity, being 'upside down', it's all the same thing. You owe more for your trade than it is worth. This is a common thing,most people owe more than their trade is worth, especially if they did not put money down or had a late payment or two.

The big question is just how upside down are you? What is the actual ACV (actual cost of vehicle) of your car? Can you tell me what you have and what your loan balance is? The figure that the dealer gave you is probably not the ACV, it's the 'Trade value', and it can and will vary depending on the car you are purchasing.

The '3000' more than your trade ad's are bogus. They are actually illegal in many States (including MD, where some of our delaerships are). You are not getting 3000.00 more than your car is worth. Period. Just think about that, it is not even possible.

The best thing to do when you owe more than your car is worth is to pay it down. I know thats not what you want to hear, but it's the truth. Think about it...say you owe 2000.00 more than the car is worth. You go and by a new car for 15,000. Well, you finance 17,000. If you were to sell the car the next day, it's value would only be 12-13000 due to it being 'used', etc, so you are already 4-5,000 upside down again. And, it will get worse every month. Wen you get ready for your next car you will be in an even worse situation.

PLUS, the rate and terms are VERY dependant on your equity situation since it is directly tied to the RISK. Think about it, the bank owns that car until your final payment. They want to be in a good position should they need to repo it.

Now, you may be in ok shape, I don't know yet. I really can help you out, but i am going to need to know more about your trade and exactly how much you owe, your payment amount now, etc. Feel free to email me if you don't want to post it on the board.

A few more general tips since we are on the subjeft again......


*Don't believe the '3,000.00 more than your trade is worth' ad's, they are bogus (see above)

*Every dealer pays the same amount for the same car, INVOICE. No dealer get's his cheaper than another, no matter what he says. NOW, their are times when a whole 'region' will get a special package or rebate, but that is always discosed by the manufacturer.

*Again, every delaer pays INVOICE for the car. BUT, invoice is not the 'true and final' cost to the dealer. Here's how it works....
1- Dealer orders car, car is put in 'que', que position depends on how many typoes of that car the dealer sells, time of year, and whether the car is already 'sold' or not.
2- Car arrives at dealership. Dealer actualy 'pays' invoice for car, meaning the invoice price is put on the dealers 'floorplan', or lump finance account for all the cars. This is why a dealer wants to turn over cars fast, the longer they sit, the more he pays in interest on his 'floorplan' loan.
3-Now, when the dealer sells the car, he gets a 'holdback' credit. This is an amount, usually 3-5% (more on this later) of the invoice price. This is how a dealer can sell a car for invoice and still make money, he knows he's getting his own 'rebate' in 3 months. You can see a delaers 'holdback' amount at www.edmunds.com. Remember, a dealer has to pay costs for advertising, financing, salaries, etc, so don't go in to the dealership demanding he sell it for 3% under invoice. A dealer refers to invoice cost as 'net', and invoice minus holdback as 'net net'. If you here these words, you know what they are talking about.
4- A 'Rebate', if there is one, is paid to the delaer from the factory. When you buy a car that has a 2000.00 rebate, the dealer 'LOSES' that 2000.00 until the factory pays him the rebate 3 months later.

*The best time to buy a car IS the last of the month. This is not a myth. There are many reasons for this, the dealer needs numbers to report to the factory- this is how he gets new inventory, bonuses,etc. Also, the salesman is not only working on commision but for bonuses. In most cases, the salesperson makes more on bonuses than commission, so the volume of cars is sometimes more important than the individual sale.

*Fact: Dealers will 'LOSE' money on new car sales. It's true, most of the money is derived from selling your trade. Used cars have no where near as much competition (they are not identical as new cars are) and typicaly have higher interest rates.

*Program cars, 'Previously Leased' cars, are 95% RENTAL cars. You have driven rental cars, right? You know people drive the crap out of them. Check them over CAREFULLY. There are good deals out there, but please watch yourself. You have every right to ask to see the 'COO' (certificate of origin) or title when buying a used (or previously leased)car. This will show you the previous owner, the state it was registered in, etc. This will allow you to use your own good judgement.

*Try not to buy your car in the rain or at night, if you do, have them put it in the shop so you can look at it under flourescent lighting. This type of lighting will show small dings'dents and paint defects a lot easier to the untrained eye.

Ok- thats enough car buying 101 for know...m fingers are getting tired.


Hope this helps!

Shawn

Shawn,

I'd like to go into some detail in my situation. I am enabling my e-mail preference on creditnet, so that you can (if you would please) e-mail me.

Just click on my name at the top of this post, and you should be able to see the option to e-mail me. Just give me few minutes to change my preferences. :-)


Thanks,

Shawn,

Thank you soooo much for the info. I'm going to get some more information on my loan and car situation and get back to you:) I understand what you're saying about paying down the loan, but to be honest with you, I don't want to pay too much down if you know what I mean, because I feel like I'm sinking money into a drowning ship. I'm 3000 upside down on the car. I was willing to put $5000 towards the down payment with the hopes that I could get into a rebate situation which would increase my down payment. But we'll see.

Originally posted by marci
Struggler and Tiff,

These are great suggestions. I never thought of rebates/incentives as a way to overcome the neg. equity. I have about $1200 in neg. equity on my car - and short of putting the neg. equity on a credit card, I was just going to eat it (as my last sub-prime lesson in personal finance) and pray that I not end up in a car accident before pay-off.

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Unfortunately, you'll still "eat" the negative equity, regardless of how the deal is worked. The good news is that $1200.00 isn't that terribly upside-down. I wouldn't recommend the credit card idea; the interest rate is probably quite a bit higher than the car loan would be. Besides, most models have enough rebate-OR-dealer markup to easily swallow $1200.00 in negative equity.
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One question: Do rebates/incentives only work for brand new cars or do some dealerships offer these on one year old or dealer cars?

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Yes, rebates (factory incentives) only apply to a brand new vehicle. Sometimes dealers will discount the retail price of a used car and call it a "rebate," but that isn't the real thing. Incentives DO apply, however, to demos. A demo is still a new car, technically, with maybe a few thousand miles on it.
Just keep in mind that the dealer still has the original invoice price wrapped up in the demo and still has to clear that price. Honestly, I personally think the best buys out there are program cars. They're usually last year's model with anywhere from 5000 to around 25,000 miles, still have the factory warranty, and are still eligible for extended factory warranties. That way, you get an almost new car that has already taken the big initial depreciation, yet still feels "new."
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Your idea sounds great - but I cringe at the prospect of losing 20% value when I sign the contract for a new car --- doesn't buying a new car inherently create negative equity (unless there's a rock bottom interest rate)?

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You're absolutely right. In fact, if you only suffer a 20% loss, you're doing well! That's why I recommend program cars. The only problem, again, is that a program car won't have a factory incentive. I still believe, however, that $1200.00 isn't buried deeply enough to really need a rebate to deal. If you were, say, $2000.00+ in the hole, then I would say, "New all the way." You're situation isn't that bad at all. Good luck!
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Thanks,

Struggler,

Thanks for your response. You've given me a bit to think over.

Thanks again,