Some car dealers will advertise that when you trade in one vehicle to buy another, they will pay off the balance of your loan – no matter how much you owe. But some people owe more on their car than the car is worth. This means they have “negative equity,” meaning the dealer’s promises to pay off their entire loan may be misleading.
The nation’s consumer protection agency, the Federal Trade Commission (FTC), says that people with negative equity should pay special attention to vehicle trade-in offers. That’s because the ad that claims that they will have no further responsibility for any amount of their old loan may be untrue. Dealers may include the negative equity in consumers’ new car loan, which would increase their monthly payments by adding principal and interest.
Here are some tips to help you avoid the snowball effect of negative equity:
• Find out what your current vehicle is worth before you negotiate the purchase of a new car. Check the National Automobile Dealers Association’s (NADA) Guides, Edmunds, and Kelley Blue Book.
• If you have negative equity, either because of your current car loan or a rollover from a previous loan:
Think about postponing your purchase until you’re in a positive equity position. You might consider paying down your loan faster by making additional, principal-only payments.
• Think about selling your car yourself to try getting more for it than its wholesale value.
If you decide to go ahead with a trade-in, ask how the negative equity is being treated in the trade-in.
• Read the contract carefully, making sure that any promises made orally are included. Don’t sign the contract until you understand all the terms, and the amount you will be paying every month.
• Keep the length of your new loan term as short as you can manage. If the negative equity amount is rolled into the new loan, the longer your loan will be, and the longer it will take you to reach positive equity in the vehicle.
For further information on negative equity and to find out where to report problems with dealer advertising and sales and finance contracts, visit http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt083.shtm