By | January 29, 2018

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.

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. Second, you borrowed money from a financial institution and you have to pay the lender back principal plus interest. 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 the song goes “You’ve got the power.”

Beware of Advertising Promises

“We will take care of what you owe on a car loan.”

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.

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.

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