Discovering you owe more on your vehicle than it’s worth happens to more people than you might think. There are many ways this can happen. For example; if you trade every two years but, in order to have the smallest possible payment, decide to finance your purchase for 84 months, unless you put down a sizable down payment or had significant equity in your trade at the time of purchase, you could owe more than your car is worth. The term commonly used to describe this is “upside down.”
Our finance department gets calls everyday from people who were told by their dealer or sales person they are “upside down.” Because banks are reluctant to finance more than the value of a new purchase, they often insist on a cash down payment to offset the negative equity in the vehicle being traded. Some people have the additional money, others do not.
What should you do if you find yourself in this situation and you are not able to come up with the extra cash?
1) You could do nothing. Drive your car until the loan is paid down.
2) If you are a two car family and have equity in your second vehicle you could trade both or refinance with your bank.
3) You could buy a new vehicle with a large manufacture rebate and use this to offset the difference.
These are just three potential solutions. Every case is different. The most important thing you can do is recognize what got you into trouble and be careful not to repeat the same mistake. Sometimes, in the heat of the moment, we buy “more car” than we should. If you wear out your truck every four years, it’s not a good idea to finance it for seven.
This may sound strange coming from a car dealer but sometimes the best advice I give is to “think about it” before signing a finance contract. Getting in over your head can take years to correct. The best way to prevent the problem in the first place is to avoid long-term financing and put down as much of a down payment as possible.