Car Buying Articles

Being "Upside Down"

Putting a Positive Spin on Negative Equity


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    Too many people discover that they are "upside down" — or in a negative equity position — when they try to trade in their car. | March 18, 2010

"I can't help you, folks," the car salesman says. "I'm afraid you're upside down in your trade-in."

All too many people hear this when they go car shopping and they don't really understand what it means. Worse yet, they don't know what to do about it. Instead, they insist, "I have to get out of this car I'm driving. Just get the deal done."

This is the wrong thing to say to a car salesman because, if you want that new car bad enough, he will be more than happy to "get you done." But you will pay the price for years to come.

Before we go any further, let's take a closer look at what "being upside down" means, why it's so hard on your wallet and what — if anything — you can do about it.

Being "upside down" means you owe more money on your car loan than the car is worth. You might have $15,000 worth of car payments to make on a car that is only worth about $10,000. That means you are $5,000 upside down. If, at that moment, you decided to buy a new car, and trade in your old car, you would have to pay the price of the new car plus the $5,000 you owe on the previous car. Now, you're really upside down and your monthly payments will be much higher.

Edmunds.com ran a poll on consumer views on negative equity. These were the results:

1,486 responsesMost popular answers on top

Do you trade in cars with negative equity?
Answer
Value
Count
%
No, I always pay off my cars first
A
819
55%
Yes, it's just part of buying a car
B
386
26%
Once, but I'll never do it again
C
281
19%

Apparently, a little more than half the car buyers bite the bullet and clear the old loan before beginning a new one. But an alarming 26 percent feel that it's "just a part of buying a car." If the negative equity carried to the new car was minimal, then it wouldn't be a terrible burden to bear. Where it gets painful is when the negative equity has been carried over more than once picking up debt like a snowball rolling downhill.

Here at Edmunds we often get e-mail from people saying, "Help! I'm upside down in my car and want to know what to do about it." The question implies that there is some magic formula to bring forgiveness. But one of the sad facts of life is that when you owe money to the bank, it requires you to pay the loan back — it's got the whole money-collecting thing down to a science.

In this era of heavily incentivized cars, though, there is one alternative. The customer cash rebate can be used to erase the negative equity. For example, if a person was $1,000 upside down in the car, and wanted to trade it in on a car that was carrying a $2,000 rebate, he or she could erase the negative equity and still make a $1,000 down payment on the car.

Dean Schneider, fleet manager at Ford of Santa Monica, said it's becoming increasingly popular to "use the rebate to make things right." He said he recently had a customer who was trading in his old Ford Explorer on a newer Explorer that carried $5,500 worth of rebates. "You can really absorb a lot of negative equity with a rebate like that," he noted.

If you go this route, make sure you check the most recent offers on Edmunds.com's Incentives and Rebates. You can also use Edmunds.com's TMV Deals of the Month to help you work the numbers instead of throwing yourself at the dealer's mercy and saying, "Please, just get me done!"

The other way to deal with negative equity is elegantly simple: live within your means. Just stay in the car, keep driving it and making the car payments. In a year or two, your payments will have caught up with the depreciation and you will begin to build some equity in the car. The tough part of this strategy is saying no to the new car bug.

Understanding negative equity, and how to manage it, is not only your key to driving happiness, it's actually the best way to have a healthy budget and a sound economic outlook on life.

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