Before you visit ANY dealership, it’s always a good idea to know where you stand in your trade-in vehicle. There’s no more awkward moment for the consumer or the dealer than when the moment of truth comes…when you find out what your vehicle is worth versus the amount of money you owe on it.
A common misconception is that the payoff on your vehicle has some relevance to the vehicle’s value. This is simply not true. These two numbers have absolutely nothing to do with each other, so do not be confused.
Today, most people with a balance owed on their car are “upside down”. You’ve probably heard that term before. Being “upside down” means simply that the balance owed on your car is greater than its value. Many dealers also refer to this as “negative equity”. You will see the terms upside down and negative equity throughout this report. A payoff is the amount of money you owe on your vehicle.
Being “upside down” means simply that the balance owed on your car is greater than its value.
As background, I recently I looked at the payoffs of 100 trade-ins versus what the vehicles were actually worth. This was totally at random, 100 trade appraisals in a row. 91 people out of 100 had a payoff; meaning only 9 people had clear titles with no liens. Of those who owed money on their trade-in, they had on average negative equity of over $6000. So if you are upside down, you are not alone.
Before you go shopping for a vehicle, you should have a good idea where you stand in your trade-in, to avoid the shock of finding out AND to make sure the dealer is treating you fairly. Below, I will walk you through exactly how to get a good idea on whether you are upside down, or if you have equity.
How to Find Out Where You Stand
We need two numbers to evaluate where you stand. The first number is the exact payoff. Whether you purchased the vehicle on a retail contract, a lease, or a balloon note, there is always a payoff that can be obtained by talking to your lender. All payoffs can be gotten immediately during normal business hours by phone, and many times they can be gotten on line. I will give some common payoff numbers at the end of this. Simply call your lender and tell them you need the payoff on your vehicle. Have your account number ready to give them, although some can do it by social security number.
The lender will give you either a ten-day payoff OR your current payoff today, and tell you how much to add per day until the vehicle is paid off. Keep this number, we’ll need it later.
STEP TWO is to get an approximate value on your trade-in to compare to the payoff. I have extensively studied all the web sites that give used vehicle evaluations. I can tell you without doubt that Kelly Blue Book by far most accurately reflects real world trade values. If anything, they may be slightly conservative, but for the purposes of analyzing your equity position, it’s better to be conservative than to over evaluate where you stand.
So go to www.kbb.com and on their homepage, you will see USED CAR VALUES by make and model. Click that link and then there are three boxes to fill out. The first one is Year. You simply put the year of your vehicle. Next, they want Make (Honda, Toyota, Ford, etc.). And last they want model (such as Accord, Camry, Focus, etc.). Then hit GO.
Now you have a choice of picking one of these three:
- Trade-In Value
- Private Party Value
- Suggested Retail Price
Be Sure to Select Trade-in Value
The other two will not give you accurate values for the purposes of trading your vehicle.
Next, you’ll input your zip code, the mileage of your vehicle and you will need to check any options your vehicle has. Be sure to input accurate information. The last step is one of the most important. You have to classify your car into one of these categories: poor, fair, good, or excellent. By each classification, it will tell you what to look for. If anything, be conservative here. Again, it is better to have a low estimated value and have a pleasant surprise once you visit a dealer. Hit GO and shortly you will have your approximate trade value.
Now you have your payoff AND the approximate value of your trade. You are well equipped to go car shopping now and deal from strength.
There are a lot of factors that determine whether you can trade or not. Let’s look at a few scenarios:
- You are less than $3000 upside down. You are in pretty good shape to trade and should not have any problems. Most lenders understand and will let you roll that amount into a new loan. Plus, on most vehicles today, there is enough in rebates to cover that amount, so you end up breaking even.
- You are $3000 to $6000 upside down. It becomes a little more difficult to trade, and to get a lender to allow you to roll that much negative equity from one loan to another, you will need to have a better than average credit rating. You might also want to choose a car with a larger rebate.
- You are over $6000 upside down. These deals are even more difficult and you may need some cash down payment to go with your car. You will also need to have good credit. Understand too that rolling this much negative equity can have a huge effect the next time you go to trade.
Other Things to Consider
Rolling money from one vehicle to the next can have a snowball effect. In other words, every time you do this, your situation gets worse.
If you roll a lot of money from one car to the next, make SURE you are buying a car you like. Odds are, you’ll have to keep it longer, so be sure it is desirable to you …you’ll be looking at it for a while.
Rolling negative equity from one vehicle to another will have an adverse effect on your new payment. For instance, if you roll $5000 from one loan to the next, on 60 months at 5.9% you will add $100 per month to the normal payment.
You can cover up more negative equity in a lease than a purchase. But understand if you do that, it will more than likely take a longer time to trade the next time.
If you roll any negative equity from one loan to the next, be SURE to purchase GAP insurance. This will cover any deficit not covered by insurance should the car get stolen or totaled.
Work toward getting even. If you roll negative equity, in essence, you end up paying for your old car AND the new car at the same time. When you can, send in extra money with your monthly payment to lower the pay off faster and get into equity quicker.
If you are upside down and are in a position to put money down on your loan, DO IT. You’ll get equity in your trade quicker, enjoy a lower payment, AND save interest charges.
I met a customer five or so years ago that kept rolling negative equity from one car to the next, to the next and so on. She rapidly traded about four times in three years. To make matters worse, she drove a lot of miles. When she got to me, she owed $72,000 on a vehicle worth $40,000. To this day, this one takes the prize for the most upside down person I have ever seen. As in most of these cases, she met the day of reckoning. She put $20,000 down and leased a new Explorer for two years at $1200 per month. Although this is an extreme case, after the two years were up, she was level with the world and able to start over. We put her in a lease plan to get a new car every two years and she is about to come up on her third new vehicle since that time. She has not been upside down since.
If you are upside down, you are in good company. Understand that NO DEALER can make your negative equity go away. They can play numbers games to cover it up, but rest assured you are still paying for it. Knowing how much negative equity you have is a valuable tool when going to buy a new vehicle. And lastly, you cannot roll negative equity from car to car to car without it catching up to you. At some point, it gets overwhelming and you get stuck, so plan ahead.
Photo Credit: Cherezoff/ShutterstockTags: car buying tips and advice trade-in