Negative Equity in my car…what is it…how did this happen to me and what can I do to fix it???

As a car dealer every day I face customers who are in trouble on a car or truck. They owe more on the car to the bank than what it is worth. The first thing they need to know is what to do about it and understand what happens when you “roll” that negative number into the your next car purchase.

First lets put the blame where it belongs, It’s not your fault, it’s not the dealers fault, it’s the pure economic demand for your particular car or truck in the market place today as compared to what you owe. I once had a salesman say “if you owed nothing is it worth nothing?” He made a good point. The market value is determined by what “other people” are willing to pay for a product. IF the market (other people) were willing to pay $20,000.00 (retail) for a 1999 Grand Am, then the wholesale market value would be in the high teens, $18,000 - $18,500.00. The difference in the wholesale and the retail is what the dealer makes as the broker in a commission to buy and re-sell the unit. Dealers make and lose thousands of dollars doing this every day. It’s called the used car business.

The first thing you must understand is a dealer has no “incentive” to underpay for your car. Bo Shembechler the famous coach for the University of Michigan Football said, “when you pass the foot ball three things can happen and two of them are bad”. The same holds true when appraising a car. Three things can happen, two are bad. 1. You can appraise the car at the perfect correct price and make the new car deal. 2. You can appraise the car too low and lose the new car deal. And 3. you can over appraise the car and lose money when you re-sell it. Dealers who are “smart” understand this and are always on the line towards the high side. Do everything you can to make a deal for the customer. But…here is the danger for you as the consumer ….BEWARE OF THE OVER-ALLOWANCE. It is ok to roll some money to the next car, just make sure you know how much it is and what effect it will have on you in the future. As a dealer, your next car purchase is just as important to me as this one; therefore, I have no incentive to make matters worse for you down the road. Here is a short story to help you understand what happens to create negative equity.

On Wednesday at 2:00 pm, the dealer goes to the auction and buys a real nice car and pays $10,000.00 wholesale. He returns to his store at 2:30 pm with the car and his salesperson sells it to a customer at 2:45 pm. However the customer buying the car has a small amount of “negative” equity and agreed to roll this amount into the next car. The customer owes $5000.00 on the car and it has an appraised value of $3200.00 ($1800.00 negative). Here are the figures as they would be in a normal deal:

Dealer pays for car at 2:00pm	$10,000.00
Sales person sells car and adds profit	$1,500.00
Sales person adds negative equity to new car	$1,800.00

Total price of vehicle:	$13,300.00
Tax at 6% is added	$798.00
Total out the door	$14,089.00

It is now 2:45 PM Car is still only worth	$10,000.00

New negative equity:	($4,089.00)

This poor customer came in the dealership and in 45 minutes went from a negative equity position of $1800.00 to more than double to $4089.00 a whopping 227%!!!!!!!! As you can see there are things added to every car deal that has nothing to do with “resale” value. The dealer profit, the tax and the negative equity. On top of that, the manufacture adds rebates and incentives that make it even worse. Rebates and incentives urge customers to look at new cars and not used. This affects the value of YOUR used car. Mine are also affected!!! We won’t even talk about regular depreciation. As the consumer, you really have many things against you. I see people all the time “shop” for the last $50.00 or so on a deal. “can you beat this deal?” are their words. The best deal is the one that has no roll over in it, and maintains the best resale value. Think of it like this: Pay STICKER for a car at $25,000.00; drive it for three years; and sell it for $24,500.00!! Your true cost was only $500.00. Well, that is an example to the extreme, but it is the principal of what you should be doing. Focus on the difference between what you pay and what it will be worth when you are done with it. That is why leasing is better than buying, but that is another memo for me to type later. Right now, back to the problem at hand. You owe more than what your car is worth. From my example above, if you “roll” it to the next car, you are just making matters worse! Get your emotions out of the equation, settle down and start thinking with your head and not your heart. This is common sense folks! But, it is also big money for you to lose if you make the wrong move! LIKE IT OR NOT…HERE ARE YOUR ONLY MOVES. I have put them in order as to what I would do as a “dealer” if I were in your shoes …by the way, I have been there!! Owed $9300.00 on a Blazer that was worth $3000.00…I know how you feel! It happens to us all!! Cars are a commodity that go down, never up!

Here are your only…and I mean only moves…

Pick the best car or truck to lease, put some money down rolling the negative equity, grab the shortest term with the highest payment you can handle, hang on to the car to the end of the lease and you are cured! Now, don’t buy ever again!
Pick the best car or truck for resale value, cover the negative equity with cash down, finance it for as short of term possible with the highest payment you can handle, hang on to the car until it is paid for and make sure you take extremely good care of the car so you get back as much as possible when you sell it!
Keep what you have until it is paid for and then lease your next car or truck, keep the lease to the end and do it again and again and again. Owning things that go down in value is NOT GOOD!
If it sounds like I like leasing better than buying its because I see the end results of both buying and leasing. People who lease and keep the lease to the end are never “negative”. If you drive lots of miles, you definitely should lease. (Ask me why later and I will explain) I own land and buildings…they go up in value…I own Gold and diamonds… they maintain value….I lease cars and computers…they do down in value! Every day when my head comes off my pillow, I want my net worth to be more than it was when I went to bed! Cash is an asset! Cars are a liability! Don’t turn an asset into a liability and think you are going to win, you can’t!

You’re upside down (negative equity) because you made a bad move previously. Making another bad move will just compound the problem. Long term financing, rebates, incentives, bad publicity (Ford Explorers), discontinued models (Olds), bad colors (grey), high miles, over all condition, popularity, the general over all economy are the reasons your car loses value beyond what it should. That’s why I lease.

I have a customer that started leasing in 1978. Every three years he gets a new car or truck from me and his payments have never been over $250.00 and he has driven everything from a Corvette to an S10 pick up! NEVER OVER $250.00 and drove a new car every three years…Never any minus equity.

You can be helped but the first matter at hand is you understanding why you are where you are with negative equity and what you can do about it. I don’t have time to argue with you over how much your trade is worth just because you owe so much…remember the wise words of Mikey: “if you owe nothing is it worth nothing?”

If I had to guess, I would say that 80% of all Americans are in a negative equity situation. The other 20% paid cash or are leasing.

Making matters worse is not an option! I have to face you in the future. Therefore, I would rather take the time to explain to you now what is wrong than to have to apologize to you later for what I did by rolling your money!

In summary; Leasing is good for every consumer. You have to control two factors. Condition and Mileage. Simply take care of the car, structure the lease for the miles you drive and let people like GM and Ford worry about what it will be worth when you are done. Please remember, if the car has 71,000 miles on it and it is 3 years old, the market does not care if you leased or bought. The value is the same. As a matter of fact, I think I could prove to you it is worth more if you lease. (Again later story). Leasing is a permanent cure and avoidance of negative equity.

I hope this information helped. Let me know what else we can do to assist you in getting your next car or truck.