So-Called “Negative Equity”

“Negative Equity” is something to keep an eye on when you’re trading in a car on which you still have a loan balance. It means that you owe more on the car than the car is worth as a used car, using its wholesale price.

Dealers try to roll your old loan balance into your new loan. So, let’s say you owe $10,000 on your old car and it’s only worth $5,000. The dealer will inflate the value of your trade-in to cover the negative equity (to get it past the lender, who might otherwise reject a loan application if it saw negative equity) but will also inflate the purchase price of your new vehicle to balance out the negative equity. So, on the deal sheets, your trade-in in this example would show as $10,000 in value, but the purchase price of your new vehicle would also be increased by $5,000.00.

This practice is now officially illegal in California, thanks to Thompson v. 10,000 RV’s, a case just published this year.

However, I’m still seeing negative equity deals in my office, sometimes with tragic results. Today I met with a retired couple who had the price of a high-end RV jacked up by some $250,000.00 to cover negative equity on their trade-in. The new vehicle was likewise a complete lemon, and they tried to get out of it. However, now the lender is coming after them for over $400,000.00. To a retired couple (whose last name is not Gates or Buffett), this could break them. We’ll be representing them here and I’ll keep you posted about which of the sorry-a&*% defendants ends up paying for their damages as well as my attorney’s fees.

I’ll keep you posted! Thanks for reading.

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