Upside-Down Loans

If you decide to sell your car before the loan is paid off, you may be an upside-down buyer, which is when you owe more money on your car loan than the vehicle is worth as a trade-in or in a private sale.

According to Tom Libby, director of industry sales for the Power Information Network, 38 percent of all new-car buyers are upside down on their loans, based on 2004 second-quarter data. This was up from 27 percent just three years ago.

Loan Trouble
More and more consumers are making questionable loan decisions. Over the last four years, upside-down loans and negative equity have increased steadily among individual consumers.
YearPercentage of New-Car Buyers Who Are Upside DownAverage Negative Equity of Those Buyers
200438%$4,480
200331%$3,738
200230%$3,285
200127%$3,054

Being upside down on your loan doesn't preclude you from buying a new vehicle. Most dealers will roll the difference into a new financing arrangement. The example below details the sort of arrangement you could make with your vehicle's lienholder or dealer if you really want to sell your car with a high outstanding balance.

Are You an Upside-Down Buyer?
Let's say you bought a 2002 Toyota Camry XLE for $22,295. After 14 months of making payments, you still owe $15,785 on the original five-year loan. You decide to buy a new 2004 Camry XLE V6 for $25,405. According to Kelley Blue Book, your 2002 Camry carries a trade-in value of $12,555. It's possible that you could finance the $25,405 you'll need for the new Camry plus the $3,230 owed on the trade-in.
2002 Toyota Camry XLE2004 Toyota Camry XLE V6
Amount owed:$15,785Purchase price:$25,405
Market value: $12,555  
Difference (Negative equity):
$3,230
Amount you are upside down:
$3,230
Total amount to be financed:  
$28,635

If you sell your car to a private buyer for less than the amount you still owe on the loan, you'll need to make up the difference between the purchase price and the outstanding balance. This is necessary in order to receive the vehicle's title so it can be transferred to the new owner and the sale is completed.

"Obviously the best solution is to keep the car until more of the balance is paid off and to be sure that your next car purchase is based on a sizable enough down payment to avoid such an occurrence," says Jim Gorzelany, managing editor of Consumers Digest magazine.

Posted on 12/20/04