How to Overcome Negative Trade Equity

2009 Honda Civic HybridIf you know you have negative trade equity, or that you are “upside down in your trade-in” then you have probably been told that by a car dealership or two. Before I go into how to best handle this situation, let’s talk about how you ended up owing more for your car than it’s currently worth.

If you had bad credit when you bought your current vehicle and bought it through a typical dealership, you probably got nailed with a high interest rate. This is especially true if you purchased it from a buy here pay here car dealer. Also, because of a high interest rate, the length of your loan was probably extended to the maximum that the lender would allow. While extending the length of your loan reduces your payments it certainly doesn’t help you. With a higher interest rate and longer loan term, much less is paid towards the principle of your loan as you make your monthly car payment.

Let me give you an example of how that works…

There’s a phrase used in the “car business” called “bumping”. This usually refers to getting a customer to agree to higher payments, a higher interest rate, a higher down payment or a longer loan. “You need to bump them up 20 bucks a month”, or “I’ll see if I can bump them up a little on their down payment”, etc. is a common example of this being used. It’s an everyday thing in the car business.

Most people only pay attention to two of these, being car payments and down payments. Most consumers aren’t aware of when they’re being “bumped” on their interest rate or on the length of the loan. That’s a good thing for car dealers because that’s where most of the profit is added to the sale!!! It’s very unfortunate for those trying to save money. This is also something that’s intentional… the dealer wants you focused on your down payment and car payment… they DO NOT want you haggling over the interest rate or the length of the loan.

So as an example, you may negotiate for hours to get a lower car payment thinking that it will save you money. Sometimes getting a lower car payment will actually cost you more money.

Let me repeat that…

Sometimes a lower car payment can cost you MORE money.

  • A 36 month loan with payments of $350 a month results in a total payback amount of $12,600.00.
  • A 48 month loan with payments of $325 a month (you saved money, right?) results in a total payback amount of $15,600.00.

Are you following this?

Many people negotiate the car payment amount without any regard for the number of payments. It’s an easy trap to fall into and dealers know this.

What This Has To Do With Negative Equity

That longer loan to reduce your car payments (or just add a few thousand to your sale without your being aware) causes the first half of your car loan to be primarily interest. Very little in the first couple years of a high interest auto loan that is extended like this goes towards actually paying the principle (the actual amount borrowed). This causes you to be upside down (negative equity) for the majority of your car loan.

In worse case scenarios, the price that you paid for the car was inflated and hidden within a longer loan (as described above) and your down payment didn’t actually get applied to the sale price but rather, just added to the sale as extra profit. This not only results in your driving off the lot owing much more than it’s worth… you would also be in this negative equity position for a few years because by the time you get the loan principle paid down to the current value of the vehicle, the vehicle has depreciated to the point of having a very low market value.

How to Overcome This Situation…

If Over $4,000 Upside Down: Some people think, “Well, I guess I’ll just drive it until the wheels fall off”. Is that a good idea? I would say that you should first see what the market value is for the car and if you can sell it to a private individual (who won’t be paying sales tax on the purchase in most states), and if the retail price for the car is near your payoff amount, sell it.

Selling a car that you owe money on isn’t difficult, it’s just a matter of having them make the check payable to the loan company with your account number in the memo box and writing out a simple bill of sale. The title will be transferred to them.

Some good places to list your vehicle…

  • Craigslist.com
  • Backpage.com
  • Autotrader.com

Make it clear in the listing that the vehicle is financed and that you are simply asking for the payoff amount. Obviously, continue to make your payments.

If under $4,000 Upside Down: Dealer rebates, incentives and aged inventory that the dealer is ready to get off the lot can help to absorb the negative equity. If a dealer is ready to move inventory or it’s towards the end of the month when sales quotas need to be made, you may be able to get that negative equity absorbed into a new loan. HOWEVER, you need to make sure that the interest rate on your new loan is LESS than the one that you currently have. Also, check the market value of the vehicle that you’re looking at buying to make sure that when you drive off the lot, you won’t be in the same situation again.

Let’s make the above clear. Make sure that the vehicle that the negative equity is being absorbed into has a strong enough market value that you’re not just tacking on additional money owed, but that the rebate actually causes the negative equity to be absorbed so that you don’t drive off in the same situation as before.

Here’s a Unique Solution

This won’t work for everyone, but it worked for several people when I was selling cars. Few salesman are willing to take the time to explore this option, but it works great.

Have two vehicles? Are both of them financed? If you have negative equity in one and positive equity in another then trading two vehicles at one time will allow the equity to be balanced out. You’ll probably need to go directly to the sales manager and tell them what your intentions are. Again, make sure your interest rates and loan term are not going to put you into a bad situation again.

I hope that this article has helped you to understand how negative equity situations arise, how to understand what to look for in a “bad deal” and also a few ways to help you get out of this situation. It’s one of the more difficult situations to be in and sometimes hard to explain in simple terms. If you look at the top of this page, you’ll see a link titled, “Where to Apply”. We have services listed on our site that can help you to overcome negative equity and other special finance situations.