Do you ever wonder why most people that have monthly payments on their car owe more money on their car than a dealership would give them for trade-in? Or why they owe more money than an insurance company would give them if they totaled the car?

Here are the two reasons:

1. Low Down Payment.

2. Low Monthly Payment.

Sure, everyone wants a really low payment with no money down when they buy a car, but does everyone understand the long-term consequences? With several years experience in the auto industry, I can say very confidently that most people do not understand the kind of hole they are creating for themselves in the long run.

In the car business, we say that people who owe too much money on their trade-in vehicle are “upside down” or “buried”. The difference between what you owe and what the car is worth to a dealer or insurance company is called “negative equity”.

Let’s start at the root of the problem. In today’s society, people want to have the nicest car they can afford, the biggest house they can afford, and the best toys they can afford. There is nothing wrong with having nice things. The problem arises when banks, credit unions, and finance companies make it too easy to buy the more expensive toys with no money down, and a low payment on an extended term. With the combination of an extended term loan (over 48 months on a car loan) and a no or low money down loan, people are not paying down the balance fast enough to keep up with the depreciation of their vehicle. A negative equity situation for at least half of the loan term becomes inevitable.

A few years ago, Mitsubishi motors ran a special on their new cars. They were offering no money down, now payments for a year, and zero percent interest. In fact, I can remember dealers giving away free gas for the year also. Assuming that everyone that bought a new Mitsubishi was going to keep it for 6+ years, it would be a great deal over time. However, in this country, most people only keep their car for 2-3 years. What do you think happened when people that bought the new Mitsubishi vehicles tried to trade them in after a couple of years? They were very upside down because they owed almost as much on the car as they did 2-3 years ago, and the car was worth much less. Many of the loans went to repossession because people either could not trade out of them, or they could not sell the cars for what they owed; the losses on those loans were high. I have not seen the same incentives offered by any other manufacturer since then.

The only way to be able to trade-in a car that you owe too much money on is to roll the negative equity balance over to the new loan, which gives you even more negative equity than you would have had. It is a vicious cycle that does not end until either you cannot trade out of the negative equity anymore due to lending guidelines, or you actually stick with a vehicle until near the end of a loan to get close to breaking even.

At WashingtonAutoCredit.com we try to help our customers see all of their options so that our customers can make an informed decision. Sometimes, our clients listen to us and sometimes they decide not to. In the end, we try to help everyone. If you are in need of an auto loan, please consider applying on our website or calling us toll-free at 888-300-3502.