Some car dealers advertise that when you trade in your car to buy another one, they will pay off the remainder of your loan. No matter how much you owe. But what if you owe more than the car is worth? This is called "negative equity," and the dealer's promises to pay off your loan can be misleading. Learn how negative equity works and how to deal with it.
- What is negative equity?
- This is how negative equity works on a trade-in
- Dealing with negative equity
- Report a problem
What is negative equity?
With rare exceptions, the older a car gets, the less it is worth. And accidents, repairs or other damage can further reduce its value. So if you borrowed money to buy a car, you may owe more on your car loan than the car is worth. When that happens, you have 'negative equity' in the car.
This is how negative equity works on a trade-in
Some car dealers say that you are not responsible for the remaining balance of your old car loan if you trade in your old car. But that may not be true. Instead, some dealers simply roll the negative equity into your net worthofcar loan, so that you ultimately pay it.
Example
Suppose you want to trade in your car for a newer model.
Your old car is worth €15,000. You still owe $18,000 on your car loan.
That means you have $3,000 in negative equity. To trade in your car, you will need to pay it $3,000.
Some dealers promise to pay $3,000 themselves, but they will actually pass the cost on to you.
They can add $3,000 to your new car loan, deduct $3,000 from your down payment, or both.
The problem? Now you have a larger loan and you have to pay interest on that €3,000 plus the costs of your new car.
If a car dealer told you they would pay off your car themselves, but they actually converted the cost into a loan, that is illegal. Report it to the FTC.
How do you know if your negative equity is part of your new car loan?
Before you sign a financing contract, the dealer must provide you with certain information about the cost of this credit. Read them. For details about the payout and the amount financed, see the installment contract. You may need to do the math to understand how the dealer will handle your negative equity. Make sure you knowForyou sign the contract. Otherwise, you may pay much more than you expect.
Dealing with negative equity
If you think your trade-in may have negative equity, find out what your current car is worth before negotiating the purchase of a new car. BillNational Automobile Dealers Association (NADA) Guidelines.,Edmunds, InKelley blue book. If you have negative equity in a car, consider these options:
- Wait to buy another car until you have positive equity in the car you are still paying for. Think e.g. to pay off your loan faster by making additional repayments.
- Sell your car yourself. You might get more for it than what a dealer says it's worth.
- Ask the dealer how he will handle negative equity if you decide to proceed with a trade-in. Read the contract carefully. Make sure any verbal promises are included. Don't sign the contract until you understand all the terms, the amount of your monthly payment, and what's included.
- Negotiate your new loan in the shortest time you can afford, especially if negative equity is rolled into the new loan. The longer the term of the loan, the longer it will take for you to build up positive equity in your new car - and the more you will pay in interest.
Report a problem
Report issues with dealer advertisem*nts and sales and financing contracts
- Federal Trade Commission klRapportFraud.ftc.gov
- VANthe state attorney
See other FTC articles atbuying and owning a car.
