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Once upside down, always upside down and it just gets worse

DEFINITION:  NEGATIVE EQUITY – Owing more on a car loan than your car is worth.

In many credit and financial problems I see, negative equity is either the source or a major contributing factor.  It’s almost impossible to escape negative equity during the life of car ownership, but it can be controlled and with discipline completely avoided.

Here is a universal rule:  When you buy a car, it loses tremendous value the minute you drive it off the lot.  New cars lose more of their percentage of value than used cars.

Here is another universal rule:  Most people pay too much for cars because they did not do adequate research and they lack the skill to negotiate.

Given these two universal rules, most of us end up owing more than our car is worth at some point during the term of ownership.  I call it the “upside down zone”.  This zone is usually reached at different points during ownership depending on the car and what you paid for it.  Most new car buyers reach this zone immediately after driving off the lot, then the car rebounds after the second or third year of ownership – as long as you avoid damage, abuse and excessive mileage.  It most cases, the longer you keep the car, the less money you will lose (if any) when you sell or trade it.

The main reason for getting into the negative equity snowball is our desire to get new cars.  We simply get tired of the old one.  Here is a typical scenario (take from real life examples):

  • John shops for his first car.  He is anxious to get one and doesn’t do his research.  He ends up paying too much for the car with high mileage.
  • John keeps the cars for almost a year.  Repair bills are eating him alive.  He decides it would be better to get a newer car than to keeping putting money in this old one.
  • John sees ads that promise “We’ll pay off your trade no matter what you owe!”.  Of course they will.  That’s because they simply add it to the price of the newer car.
  • John finds a newer car.
  • The dealer informs him that he is upside down by $5,000, so they simply add it to his new loan.
  • Now he has a 2005 Pontiac Gran Prix and ends up owing nearly $18,000 on it!  So he had to stretch out the car payments to 72 months.
  • He keeps the Grand Prix for 2-years and decides to get a newer car.
  • Guess what?  He’s upside down again – but this time it’s even worse because of the first go-around.
  • Eventually he ends up owing $26,000 on a 2008 Chevy Impala  and his payments are so high he can hardly make them.
  • One year late he decides he needs to downsize his car loan.  But he can’t get enough money to pay off his current car.
  • The car is eventually repossessed and sold at auction for $3,500 leaving his with a deficiency of $22,000.
  • When the lender comes after him for collection on the 22-grand, he files bankruptcy because he doesn’t have the money and in fact, has credit card debt from putting some of his payments on MasterCard.


  • The number one reason people begin the negative equity snowball is paying too much for the car.  So do your research!  Stand your ground.  There’s never a reason to over-pay for a car.
  • The number two reason for beginning the “snowball” is allowing the dealer to “pack the car”.  That is a term to describe adding extra things to the car deal to boost the dealer’s profits.  Some of the packing includes:  extended warranties, credit life and disability insurance, paint protectant, fabric guards and other “add-ons”.  I am not telling you to avoid all after-market goodies, I am just saying that they are not always practical if you can’t afford it or if they put the price of the car beyond what is reasonable for resale.
  • The number three reason for the negative equity snowball are long-term loans.  Loans can now be stretched out to 7-years!  That’s 84-months!  Think about it.  It is realistic to believe that you will keep a car that long?  And keep in mind that the longer you pay on a car, the less you pay on principal each month.  So it takes a very long time to whittle away at the actual principal balance.


Sometimes, if you’re too far gone there just is not an easy way to get out of it.  For example, you are more than $10,000 upside down and the car’s maintenance and repairs are eating you alive.  For those cases, you may need to park the car and keep paying on it until it is paid off.  Then buy a cheap used car to drive.  If that’s impossible, sometimes bankruptcy is the only way out.

If you are upside down by under $10,000 it is always best to keep the car, maintain it and pay it off.  Yo will build excellent credit and at least have transportation.

In some rare cases you may be able to get a friend or relative to give you a private loan.  That can help you save money on interest and finance charges.  Individuals make very little with money sitting in the bank and may be willing to finance you at reasonable rates.

If the moon and stars align properly there is another slim chance of getting out:  Buy a new car where you get free financing for 5-years.  In some of those cases, there is enough room to slip in the negative equity without having a terribly high payment.




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