Negative Equity in Cars
More and more consumers are upside down or underwater or out of equity on their cars and it’s starting to show up in major news stories across the country. Here’s one that talks about somebody who is $29,000 out of equity, meaning that they owe $29,000 more than their car is worth. The way they’re trying to get out of it is to buy a new Mercedes-Benz and pay $2,500 a month for the car. You might say, well, gee, if you’re already $30,000 upside down in your car, why would you want to buy a Mercedes-Benz and pay $2,500?
Why Choose a More Expensive Car to Hide Negative Equity
Part of the reason is that may be the only way out without doing a car short sale. We’ll talk later about how to do a short sale to get out of this negative equity. But for this person, what they’re trying to do is roll over that negative equity into their next car. So if you have $30,000 negative equity, that has to be tacked on and added on to the next car. You can’t do that with a cheap car. If you buy a $20,000— I don’t even know if there are $20,000 cars anymore, but let’s say a $25,000 Honda Civic, and you want to add on $30,000 worth of extra negative equity, you’re trying to finance $55,000, more than double the price of that car. The book value is not going to match up.
Hiding Negative Equity in Expensive Cars
It’s easier to hide negative equity on a more expensive car. If you buy a $70,000 car and you want to hide $29,000, now you’re trying to finance $99,000 on a $70,000 car. Many lenders will give you 15% or 20% over the MSRP, or the book value of the car, plus some add-ons. So when you have negative equity, sometimes the way that is handled is by putting the negative equity onto a more expensive car. It’s easier to bury it; it’s easier to hide it. But it just prolongs the problem. You’re going to be now saddled with a high payment, in this case, $2,500. The depreciation on a $70,000 car is going to be a lot more than on a cheaper car.
Short Sale vs. Hiding Negative Equity
This is why a car short sale is sometimes a better way to go. Another article talks about how this is becoming more common. A rising share of consumers owe more on their car than it’s worth. One in five consumers had negative equity of more than $10,000. Not one in five have negative equity at all, but 20% have more than $10,000 buried on their car. That’s a serious deal.
Addressing Negative Equity
So what you want to do is find out whether or not you have an out, whether or not you can somehow get rid of this negative equity using a car short sale or using some other type of method. You can get more information at the link below. But if you do have negative equity and it’s significant—more than a thousand or two—you want to look at options because it will continue to add up. If you roll it into another car, it’s not going to go away. It’s just going to become, at some point, an irreplaceable stain on your credit, and you’re just going to be enslaved to a car payment that keeps going up and up.
The Importance of Addressing Negative Equity
You’re not alone in the world. You know, 20% of people have more than $10,000 in negative equity. So if you have less than $10,000, you’re actually in good shape. But you still want to look to see how you can address it.
