Personal Finance

Negative Car Equity

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Sr. Member
Sep 25, 2006
598 posts
58 upvotes
Ottawa
Yup. If you can't afford to pay cash, you can't afford the car.

As a rfd'er, if people stopped buying new, then I won't have many used cars to choose from. My stocks will likely retreat since it will affect the economy. I encourage people to finance cars over 10years.

All jokes aside, just be responsible and live within your means. If you don't have money saved and need a car, what's wrong with financing a $6000 car over a short 1yr term?
Deal Fanatic
Nov 9, 2013
5882 posts
7460 upvotes
Edmonton, AB
raspeed wrote: If you purchase smartly, your vehicle should be worth more than what's owing on it after about 3 years (assuming a 5 year loan).
I don't understand...? Cars are depreciating assests, the most they are every worth is what you pay for them on the lot and sadly it's downhill from there. How can it be worth more than what's owing 3 years out? Do you mean the principle of the loan should be less than the current value of the vehicle?
Sr. Member
Aug 29, 2004
952 posts
271 upvotes
This is why leasing makes sense - you have cost certainty at term end. Used car values are going down because nobody has cash to buy - everyone finances new, because it is a lot easier to pay $300 every cheque than save the $10-20k needed for a good, relatively new, used car.

The reality is for most people that car payments will be a permanent part of their budget, just as for most people poor financial planning is a fact.
Deal Fanatic
Apr 16, 2007
8134 posts
3485 upvotes
Financial District B…
treva84 wrote: I don't understand...? Cars are depreciating assests, the most they are every worth is what you pay for them on the lot and sadly it's downhill from there. How can it be worth more than what's owing 3 years out? Do you mean the principle of the loan should be less than the current value of the vehicle?
"vehicle should be worth more than what's owing"

What he means by 'smartly' is those who are able to pay the taxes plus some depreciation at the onset will be in an equity position sooner than those who opt for zero down
sample here:
length-car-loan-1324789/5/#post16639457

The 'worth more' than whats 'owing' = means the ACV(actual cash value) is more than the current 'lien'
----------------------------Licensed Credit Bureau member, S1, FI Automotive, CCP forums most banned = x 13 and counting, guess who that is?... stomped to the curb once again
Deal Expert
Mar 25, 2005
22706 posts
3696 upvotes
Assuming you have cash on hand and rates are reasonable, whats the downside in negative equity? I'd rather have -$5,000 in the car and +$5,000 in cash, assuming my risk-free rate is higher than the loan.
Deal Fanatic
Apr 16, 2007
8134 posts
3485 upvotes
Financial District B…
Kasakato wrote: Assuming you have cash on hand and rates are reasonable, whats the downside in negative equity? I'd rather have -$5,000 in the car and +$5,000 in cash, assuming my risk-free rate is higher than the loan.
1) You owe 13k on 8k fair market value auto. You crack your car up and its written off, insurance sends the lien holder the fair market value. You are now stuck with a 5k loan you have to continue to service but don't have a car to show for it.
The tradeline continues to report of course. With this open instalment loan it will and may be difficult to secure another new or used auto loan because with it your TDSR will be out of whack.
You now end up scouring the earth looking for a lender who can consolidate this loan so that you can get another car. Slim to none if credit is marginal.
If unsuccessful, the default rate on these remaining loans are huge.

2) Your transportation needs change. You need something bigger, safer etc etc. You're soon hit with reality that you can't trade it in unless you have enough money down to cover the negative equity of the trade.
Furthermore, if your credit is mediocre the next lender will not only want the negative equity covered but may also require some down on the new(er) car deal. This could mean anywhere from 5-8k.
What usually happens is people in this scenario are forced to continue to drive and service this upsidedown loan until they can be in an equity position where trading it in makes more sense.

3) You lost your job and you need to sell your car. Or just apply any other scenario where you need to sell it. After months and months of advertising it all you could get is 8k. You sell it and send the 8k to the lien holder to reduce the balance. The rest of this story will be same as above.

Upsidedown auto loans are near epidemic levels. Notice lately a lot of manufacturers are not aggressively advertising zero down as much as they we're before.
Pay now or pay later is a choice. Sure lots of people stick to the narrative that they'd rather have the 5k sitting in their bank or invested etc etc but the reality is very few do because they always find something else to spend that money on.


Here's a perfect example:
car-written-off-insurance-offer-less-th ... st14157147
----------------------------Licensed Credit Bureau member, S1, FI Automotive, CCP forums most banned = x 13 and counting, guess who that is?... stomped to the curb once again
Deal Expert
Mar 25, 2005
22706 posts
3696 upvotes
mikeymike1 wrote: 1) You owe 13k on 8k fair market value auto. You crack your car up and its written off, insurance sends the lien holder the fair market value. You are now stuck with a 5k loan you have to continue to service but don't have a car to show for it.
The tradeline continues to report of course. With this open instalment loan it will and may be difficult to secure another new or used auto loan because with it your TDSR will be out of whack.
You now end up scouring the earth looking for a lender who can consolidate this loan so that you can get another car. Slim to none if credit is marginal.
If unsuccessful, the default rate on these remaining loans are huge.

2) Your transportation needs change. You need something bigger, safer etc etc. You're soon hit with reality that you can't trade it in unless you have enough money down to cover the negative equity of the trade.
Furthermore, if your credit is mediocre the next lender will not only want the negative equity covered but may also require some down on the new(er) car deal. This could mean anywhere from 5-8k.
What usually happens is people in this scenario are forced to continue to drive and service this upsidedown loan until they can be in an equity position where trading it in makes more sense.

3) You lost your job and you need to sell your car. Or just apply any other scenario where you need to sell it. After months and months of advertising it all you could get is 8k. You sell it and send the 8k to the lien holder to reduce the balance. The rest of this story will be same as above.

Upsidedown auto loans are near epidemic levels. Notice lately a lot of manufacturers are not aggressively advertising zero down as much as they we're before.
Pay now or pay later is a choice. Sure lots of people stick to the narrative that they'd rather have the 5k sitting in their bank or invested etc etc but the reality is very few do because they always find something else to spend that money on.


Here's a perfect example:
car-written-off-insurance-offer-less-th ... st14157147
Sounds fantastic to me. I keep the cash, earn my risk-free rate and pocket the difference.
Moderator
May 28, 2012
12484 posts
5278 upvotes
Saskatoon
I don't like being in debt, so the last four cars we bought were with cash, and they were new...we tend to keep our cars for a long time as well.
Jr. Member
Feb 8, 2014
107 posts
18 upvotes
Toronto
Cash moneyed my first car used
Leased a brand new car

... In a few months the lease goes back and I'm going to buy a used cash monies.

From what I learned - I hate monthly payments and I hate debt. I gained nothing with a new car and it cost more over lease than I had with my first used for double the life. Cash monies all the way and buy a nicer used and drive it til it don't.
Deal Fanatic
Nov 9, 2013
5882 posts
7460 upvotes
Edmonton, AB
Kasakato wrote: Sounds fantastic to me. I keep the cash, earn my risk-free rate and pocket the difference.
While I'm not calling you a liar, I think you are the minority of the group. As Mikey said it seems most people find a way to spend this money. It's analogous to the renting vs. buying a home argument - renting comes out ahead (assuming you invest the difference) but in reality home owners have a higher net worth because renters usually never invest the difference.

Kas, what would happen if that +5000 were to disappear (i.e job loss, repairs, etc). Then what?
Deal Expert
Mar 25, 2005
22706 posts
3696 upvotes
treva84 wrote: While I'm not calling you a liar, I think you are the minority of the group. As Mikey said it seems most people find a way to spend this money. It's analogous to the renting vs. buying a home argument - renting comes out ahead (assuming you invest the difference) but in reality home owners have a higher net worth because renters usually never invest the difference.

Kas, what would happen if that +5000 were to disappear (i.e job loss, repairs, etc). Then what?
Agreed many people cannot save what is required to stay out of trouble. Personally I keep my own balance sheet and always have the difference between the liquidated cash value of my car and it's actual cash liability on hand. In the first 2-5 years it's zero with insurance (although of course there's a premium attatched), and balloons after that. It's kept separate from a rainy day fund on my spreadsheet. Thankfully I'm personally in a cash flow situation where the risk of loosing that fund is almost nil. I view negative equity as leverage.

In the end it comes down to the individual. Some can save and see future libialities and others cannot.
Deal Guru
User avatar
Nov 30, 2009
12178 posts
603 upvotes
Toronto
Keep in mind, that the same car also saves you in 1) time 2) convenience 3) experiences (road trips). How do most people get to work to make their money? They commute by an automobile. So while yes a car does not directly provide you a positive ROI, it's intangible benefits more than makes up for it IMO. Unless of course you are central, but yet, services like ZipCare Car2Go and CarShare are still popular.

Sometimes, people put too much emphasis on one thing. P.S. I'm not saying you should lease a car forever or keep buying the latest car. But driving an unsafe/unreliable/modest vehicle does not get you any farther ahead; it all depends on how much you make/lifestyle.
Deal Guru
User avatar
Nov 30, 2009
12178 posts
603 upvotes
Toronto
FutureCEO wrote: If you can't pay cash for a car then you simply cannot afford it.

And no, I don't buy the excuse about not wanting to sell investments. People don't take debt on things they can afford. When is the last time you bought a bag of potatoe chips on a 6 year financing term?
Who's giving you financial advise? If a car is a waste of money as they say, why would you dump all your hard earned cash into it in one go when you can finance it and diversify your portfolio? Negotiating is an art, and not many have it.
Sr. Member
User avatar
Mar 13, 2012
865 posts
145 upvotes
Planet Earth
LostInTruth wrote: If a car is a waste of money as they say, why would you dump all your hard earned cash into it in one go when you can finance it and diversify your portfolio?
No interest payments for one and no long term debt to be financed on a lost cause investment with no possible return.
LostInTruth wrote: Negotiating is an art, and not many have it.
Completly agree. Don't let sales people get the best of you. Do your own math and be prepared to just walk away. There is another car dealer blocks away.
If at first you don't succeed, destroy all evidence that you even tried.
Deal Guru
User avatar
Nov 18, 2005
11955 posts
3699 upvotes
Kingston
gomyone wrote: On the other hand, there are a group of people on RFD who say that leasing a new car is usually a bad idea since the financing costs to own are cheaper. But since the car is typically a depreciating asset, in many cases, you would come out with negative equity after six or seven years by purchase financing a car as your article suggests. Why then wouldn't leasing be a better option - particularly if you are adept at negotiating the residual contained in the lease? To me, leasing makes sense because you are only paying for the portion of the vehicle you are driving (most leases are also not longer than 4 years). Of course, the best option at the end of the day is just to buy a slightly used car outright in cash, since a good part of the depreciation has already occurred but impacted someone else.
Counterpoints:
1. If you are adept at negotiating a lease it is reasonable to expect that you'd be adept at negotiating a purchase. Negotiating leases tend to be more difficult to do well because you are essentially negotiating all of these factors at once, making it tough to know what you are getting: Purchase price, buy back price, interest rate, mileage limits, trade-in.
2. You are correct that you are "only paying for the portion of the vehicle you are using", but......you are paying for the most expensive portion of the vehicle's life (the first few years) and paying more interest because you are paying interest on the whole car value (underlying "loan"). EG if your lease pays for 40% of the car's value you are always paying interest on the other 60% (at today's interest rate it would be reasonable to say you aren't paying much).
3. (I think) You don't benefit if the value of the car at the end of the car exceeds the buy back price. I know you could buy the car then sell it to capture this, but you'd lose the HST paid in the process which would likely make it uneconomical.
4. You are obligated to make a new purchase/lease decision at the end of your lease, not when it is most convenient for you or when you can get the best deal.
leflower wrote: I drive a brand new bmw 328 xdrive and believe me when I rev the engine and make hairpin turns I smile a ton.
There are those who enjoy cars and don't mind paying for the pleasure. I can also buy a Joe Fresh shirt for 20 bucks but quality sucks and you look like a fool wearing it.
If you have the money, spend it and enjoy.
leflower wrote: the post above was for you. Its not about "status" its about enjoyment. I could never drive your 15 year old junk and enjoy it.
I agree that it is about enjoyment and that is fine if that's where you get value for your $. But I believe that for many a high end car has a lot to do with getting enjoyment from "status" and being able to tell you about what a great car they have.
Deal Fanatic
Mar 24, 2008
6278 posts
2753 upvotes
Toronto
Mars2012 wrote: I don't like being in debt, so the last four cars we bought were with cash, and they were new...we tend to keep our cars for a long time as well.
Four cars (2 each for a couple I guess), bought new and "kept for a long time"? How old are you :lol: just kidding. Buying a year or two old car in cash and keeping it for 10 years is the best option if one I'd looking to save money IMO.
Deal Addict
Jan 30, 2012
1836 posts
1399 upvotes
TORONTO
scarface wrote: This is why leasing makes sense - you have cost certainty at term end.
LOL. It's not uncommon for a dealership to charge all sorts of fees when you return a leased vehicle and say they are for excess wear & tear.

http://www.theglobeandmail.com/globe-dr ... le4217122/
http://www.apa.ca/returningyourleasedvehicle.asp
http://www.edmunds.com/car-leasing/how- ... d-car.html
http://www.thestar.com/business/persona ... d_car.html

Of course, if you get a new car from the same dealership these fees will magically disappear, but that takes away your most valuable negotiating tool - getting up and walking away.
scarface wrote: The reality is for most people that car payments will be a permanent part of their budget,
If you lease, car payments will also be a permanent part of your budget.
Moderator
May 28, 2012
12484 posts
5278 upvotes
Saskatoon
ksgill wrote: Four cars (2 each for a couple I guess), bought new and "kept for a long time"? How old are you :lol: just kidding. Buying a year or two old car in cash and keeping it for 10 years is the best option if one I'd looking to save money IMO.
Bought a car in 2008 to replace my 1995 Civic...bought a car in 2011 for the kids to use, car was totalled in 2013 (not at-fault), replaced in 2013...husband's vehicle was from 1997, he got a new car late last year. Now, do you believe me? :razz:
Deal Guru
User avatar
Nov 30, 2009
12178 posts
603 upvotes
Toronto
Allen32 wrote: No interest payments for one and no long term debt to be financed on a lost cause investment with no possible return.

Well, it depends. A lot of the interest payments tend to be low these days. If you have the disposable cash then by all means, but most don't and it'd be wiser to have that cash stored for an emergency fund.

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