Edmunds just released a report that is pretty startling to me. They claim that their studies show that over 40% of cars purchased today, are by people who role negative equity from their current cars into their new deals. That's a pretty high freakin' number I thought. They claim the number is so high that within the next five years, car companies are going to struggle to find enough "qualified buyers". As if GM doesn't have enough problems as it is!

I understand sometimes that this situation is unavoidable - divorce, lose your job, medical bills etc, hell..even that untamable desire we all have to buy the latest, fastest, bestest car or that car we have always dreamed of owning (until the next one comes along in 3 months at least) BUT 40%!!!!

I actually want to trade the 2.0T in for a new truck but I am going to be about 5K upside down on the Audi so that has been stopping me from doing the deal. And this got me thinking.

Anyone have any opinions on this? Do you trade in and role your negative equity? You never do this? Only in certain circumstances?

It would be interesting to hear people's thoughts on this.

 

That 40% number sounds so high! I don't do this kind of stuff. When dealing with used cars, I go with cash. Negative equity is for suckers. These people have gotten in over their heads amd should be rethinking their car purchases. Ok ok, I know that the siren song of financing is out there for all of us, and I don't want to be an ahole, but come on! What were these people thinking was going to happen? If you want a hot new car, you gotta pay. If I'm thinking about a new S6 or an M5, then I better come with 60K from the get go. Don't think about these cars and a $2175 monthly payment because you will get tired and lose on that bad boy.

 

There's nothing wrong with financing a car, even if doing so gets you upside down. Think about it, the way you purchase a car has nothing to do with it's valuation. If you buy a car for $20k and the next year it's only worth $15k, you've lost that $5k whether you paid cash up front or if you financed it. There's no way around it, if a car loses value, you lose money. Negative equity is a fact of life if you finance cars. The only real problem with it is that you obviously get less selling a car to a dealer as a trade-in than if you search for a private buyer, and sometimes if you're very upside down, you might not have the capital to sell the car for less than the amount due, then make up the difference. That's where you lose the money, if you have to roll over the existing debt to a dealer who won't give you as much as if you sold the car yourself. If you do have the capital to make up the difference, then you're in no different position no matter how you aquired the car.

I always finance cars for 100% because I can take the money that I didn't give to the dealer, invest it, and make considerably more than the interest I'm paying on the loan. For example, I bought the S4 for about $25k including taxes, 100% financing, nothing down. When I sold it, the dealer gave me $19k, so you would think I lost $6k, but using the $25k that I would have spent on the car, I gave a hard money deal to a borrower that over the three year term of the loan will make me an additional $16k on top of the initial $25k. When I financed the M5, I would have had to pull about $39 out of pocket, instead I made another hard money deal that will make over $20k in the next two years, and if I'd paid cash for the M5, I wouldn't have been able to fund that deal.

You should never pull any more money out of pocket for anything that you don't have to. It's always better to use OPM (other people's money) for everything you can. I'm more than happy to give the bank 7%, because I can make 20%+ on the money that I otherwise wouldn't have available.

 

I can get behind Silver's plan 100% if you are taking cash and making a higher percentage with it. I understand the concept of "time value of money". I get the feeling that a huge majority of that 40% is doing no such thing.

So what are these "hard money deals" that make such a high percentage return in the short term?

 

I'm with you on this 100%. I never pull $ out of my own pocket unless I have to.

 

Yep. Most of them are just rolling negative equity into their next deal because they want the next best, fastest, more expensive car, and are willing to make that sacrifice to get it.

And some people don't even realize what they are doing and get taken for a BIG ride by the greedy dealerships. I don't know if I feel sorry or pity for this group? Ignorance is not always bliss I guess.

Like Silver said....if you know what you are doing and can make it work in your favor then you can play the negative equity game and come out on top, but like you said correctly, most people don't. And it's these people that end up paying $1000 a month payments on a new Chevy Impala when the bottom drops out of their barrel.