A few years ago, I woke up. It cost me more to go to work than I was making, thanks to commuting, living expenses, and a non-profit salary. I was the one not profiting. Life was great when I simply ignored the mounting debt. There was only so long that could last, though.
There are many people who now may be in a similar situation, in which life is better when you ignore personal monthly losses. Society normally allows people to do so thanks to public acceptance of debt. Some people may not realize their condition until they try to make certain financial transactions, like buying a house or selling a car.
If you’re still making payments to a bank for your car, you don’t actually own it. In order to make nicer cars more “affordabe,” dealerships allow people to buy cars with a low monthly payment. Theoretically, you build equity in the car by paying down more of the loan’s principle each month.
The only problem is that cars, especially the “nicer” cars that dealerships try to make affordable, depreciate. Every year, the car is worth less than the year before, if its worth is derived from how much the market would pay to buy the car from you.
So with fast depreciation and slow equity building, chances are the two will cross, and you’ll owe more to the bank than the car is worth. This is known as being “upside-down.” Many people don’t realize they are upside-down until they try to determine the value of the vehicle.
MSN is offering an article on how to sell a car you don’t own, which is interesting for those who are upside-down on their car.
Here are some tips:
- Don’t trade in while you’re upside-down. If you trade it in for a new car at the dealership, the amount you owe will often be rolled into your new loan. You’ll still be paying off a portion of your old loan when you buy a new car.
- Consider “GAP” insurance. While that stands for “Guaranteed Auto Protection,” it’s designed to help fill the “gap” in value if you must sell while upside-down.
- Sell it yourself. You’ll get more for the car than if you trade it in at a dealership, but you’ll have to work with your bank to get them to release ownership of the car. You may have to pay the loan off in full before they give up the lien, so the timing may not be right for a private sale. The buyer may not be willing to go through the hassle of paying you first then waiting for the bank to release the title.
If you go to a dealer to trade in, you might be able to manage a deal. The dealership is almost always the winner in any negotiation, despite promotions and incentives, even if they don’t make it sound that way.
According to the last time I checked edmunds.com last month, my car would be worth more than $11,000 if I tried to sell it (which I don’t plan on doing). I have a little over $4,000 left on a family-member loan that allowed me to buy the car in “cash.” If I owed more than $11,000 on this loan, I’d be upside-down.
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Not to hijack your post, but the NADA Guides offer a better price for sellers than Kelley Blue Book. I’m not sure how it compares to Edmunds, but a dealer will usually honor the NADA price since, NADA are the dealers.
NADA may be better for dealers, but most private sales still look at Kelley. I just sold a car for a mere $300 less than Kelley Blue Book excellent condition.
Not to be a pedant, but you do legally own the car in the legal sense that ownership means you have exclusive use of the property, etc. The dealership can’t decide to let the dealer’s kid take your car out for the weekend or whatever.
If you use a loan to buy a car (or house, etc), it has a lien on it for the amount of the balance due on the note, and your ownership rights are bound by any other terms in the note. Unless you buy your car through an explicit “rent to own” arrangement, you own the car as soon as you sign the purchase agreement.
The reason I don’t like muddying “ownership” discussions in this way is because some people have been known to exploit this type of “non-ownership” argument to extort terms out of people that they wouldn’t get otherwise. You don’t see this as much with cars but you do see it with people trying to buy houses from people in over their head.
>Consider “GAP� insurance. While that stands for “Guaranteed Auto Protection,� it’s designed to help fill the “gap� in value if you must sell while upside-down.
GAP insurance will not help you when selling an “upside-down” vehicle. This insurance is to cover the entire cost of an upside-down vehicle that has been totalled in a wreck.
Example:
You owe $23,000 on a car that is worth $20,000 and you have full coverage in case of accidents. If you total your car, the insurance will pay you what the car is worth ($20,000), not what you owe($23,000). The gap insurance is designed to pay that $3000 gap in your full coverage.