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Cars, Trucks, Vans & Automotive

2003-06-01 16:04:00

What is 'upside down?'

: What does the term 'upside down' mean? Is it the same thing as 'negative equity'?  How can some dealers say they can get rid of this?  Isn't the only way to get rid of debt to pay it off?  

ANSWER:  This is an excellent question about one of the most misunderstood issues in the retail automotive industry, and the short of it is yes, the term "upside down" does refer to the negative equity an individual has owed on his or her vehicle.    Many "experts" in the automotive industry estimate that as much as 80% of the population is in a negative equity position on the vehicles they own! But before I go getting everyone worked up and ready to hunt down car dealers with pitchforks and torches, let me explain how even the wisest of car buyers can find themselves in this position. Like most machinery and equipment, automobiles are a depreciating asset. This means they have a limited life span with limited capabilities, and consumers are constantly being deluged with newer and better models with better options and yep, you guessed it, higher prices. I tell many of my customers that when I was coming up in the car business my father used to remark that when a pickup truck costs more than $20,000, we might as well lock the doors because nobody will pay that much, and today I see people buying trucks that cost nearly $50,000! Prices this high require mortgage payments, not auto loans!    This combination of higher prices and longer loan terms has had the largest impact on consumers with regard to equity or lack thereof in their vehicle. Years ago, people used to buy vehicles and either pay cash or take out two to three year loans to pay for them. There was even a time when some banks did not make auto loans! And those that did required substantial down payments. Today, you can get auto loans with no money down and terms up to 7 or 8 years. Now, this might be a great way of getting the payment you are looking for, but longer term loans consist of mostly interest payments for the first couple of years with very little principal reduction. Many people think they will keep a vehicle forever and thus avoid a negative equity situation, but the average individual keeps their vehicle for less than three years. It's easy to see where this combination of factors can soon lead to a frightening car ownership experience.    Don't be fooled by car dealers proclaiming that they will pay off your car loan no matter what you owe. I believe these statements and practices to be unethical. The truth of the matter is that you will be paying off your vehicle. If you go to purchase a new or used vehicle, the amount you owe on your trade-in is always added into the loan you take out for your new vehicle. So, while your trade-in is paid off, you have just rolled over what you owe on it to your next vehicle, and uh-oh, just increased the amount you owe on your new vehicle!! If you are financing the sales tax also and putting no money down, chances are you now owe more on the car than it is worth.    So, the moral to this story is to pay your debts. The only way to be debt free is to pay off that car you're driving or at least keep it until you have paid down to a point where what you owe is less than the value of the vehicle. Or better yet, don't buy vehicles without putting money down and try not to add the extras like sales tax or extended warranties to your loan, pay cash for these items. Also, try to purchase vehicles that have the best resale value. Like I have been saying from day one, an automobile purchase is a major investment. It never ceases to amaze me that people buy vehicles with little or no prior research or preparation. Always do your homework and do business with someone you know and trust. Over the long term you'll come out the winner and hang on to more of your hard earned money.