Negative Equity

Everybody's Uncle,

We have a 4-year-old van that is worth at least $5000, but owe about $11,000.We have no warranty anymore. We do not have much money to close the gap . We are in need of a vehicle that can tow a heavy trailer (probably a truck or SUV). What can we do? We cannot wait much longer, we are afraid that the van will soon have mechanical problems, which will be very expensive. Any suggestions?

(Need New Truck,)

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Dear NNT,

Owing more than the vehicle is worth creates the delicate condition of negative equity. Lien holders want the vehicle to be worth more than the financed amount to secure their loan. Under some circumstance (Ex: high mileage) vehicle value drops below the amount owed. Some individuals allow the vehicle to be repossessed voluntarily or involuntarily, thinking the lien holder takes the loss. A repossessed vehicle can be sold "at auction" often well below the market value. You (the former owner) can be hit with a judgement for the difference between auctioned price and market value. My advice is to avoid repossession under virtually all circumstances.

Options:
Financially, private sale of the vehicle at the highest price is the best the best course, dollar-wise. Get the highest retail market price; use the money as a down payment on the next vehicle.

Trading the vehicle (wholesale) to a dealer yields fewer dollars but has advantages. Repair and ethical responsibilities for resale shifts to the dealer. Avoids the hassle of private sale and gap between vehicle sold and new vehicle.


Buy an appropriate vehicle. Don't buy a van if you need a truck. That could be the underlying cause of your negative equity situation - excessive wear due to inappropriate use.

You don't have to purchase a new vehicle. Seek out a reputable dealer and avoid some of the depreciation hit you take on a new vehicle. If you have a dependable mechanic ask him to check the target vehicle and/or have a diagnostic test performed by an independent party.

Leasing is an option I do not recommend. Scroll down to my comparison of buy or lease. You would be a financial dead duck if your present vehicle were leased.

Most important, think logically and long term before making any decision. Stay within your financial means. Don't get caught up in today's pay later mindset.


Here if you need me,
Everybody's Uncle