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Vehicle Purchasing Tips – Avoid Negative Equity.

Beware of messages such as:

“We’ll pay off your loan no matter how much you owe”

Some car dealers advertise that when you trade in one vehicle to buy another, they will pay off the balance of your loan – no matter how much you owe. But some people owe more on their car than the car is worth. This is called “negative equity,” and for such individuals, the dealer’s promises to pay off their entire loan may be misleading.

The Federal Trade Commission (FTC), the nation’s consumer protection agency, says that people with negative equity should pay special attention to vehicle trade-in offers. That’s because although the ad claims that they will have no further responsibility for any amount of their old loan, the ad may be untrue. Dealers may include the negative equity in consumers’ new car loan. That would increase their monthly payments by adding principal and interest.

Here’s how that might play out: Say you want to trade in your car for a newer model. Your loan payoff is $18,000, but your car is worth$15,000. You have negative equity of $3,000, which must be paid if you want to trade-in your vehicle. If the dealer promises to pay off this $3,000, it should not be included in your new loan. Nevertheless, some dealers add the $3,000 to the loan for your new car, deduct the amount from your down payment, or do both. In either case, this would increase your monthly payments: not only would the $3,000 be added to the principal, but you would be financing it, too.

The FTC says that understanding how negative equity works in a vehicle trade-in can help you make a better informed choice about purchasing and financing a car, and help you identify whether the claims in car ads that promise to pay off your loan are misleading.

Federal law requires that before you sign a contract to finance the purchase of a car, the dealer/lender must give you certain disclosures about the cost of that credit. Read them, and look for the details about the down payment and the amount financed. Make sure you understand how your negative equity is being treated before you sign the contract. Otherwise, you may wind up paying a lot more than you expect.

Dealing with Negative Automobile Equity

Here are some tips to help you avoid the snowball effect of negative equity:

  • Find out what your current vehicle is worth before you negotiate the purchase of a new car. Check the National Automobile Dealers Association’s (NADA) Guides, Edmunds, and Kelley Blue Book.
  • If you have negative equity, either because of your current car loan or a rollover from a previous loan:
    • think about postponing your purchase until you’re in a positive equity position. For example, consider paying down your loan faster by making additional payments or with a lump sum payment from your income tax refund.
    • think about selling your car yourself to try to get more for it than its wholesale value
    • if you decide to go ahead with a trade-in, ask how the negative equity is being treated in the trade-in. Read the contract carefully, making sure that any promises made orally are included. Don’t sign the bill of sale or contract until you understand all the terms.
    • keep the length of your new loan term as short as you can manage. If the negative equity amount is rolled into the new loan, the longer your loan, the longer you will take to reach positive equity in the vehicle.

St Francis FCU Approach

When you finance your vehicle loan with St Francis FCU, our trained loan officers will review the value of the vehicle you are purchasing through NADA guides and will inform you if the amount to be financed, as listed on the dealer’s bill of sale, is higher than the value of the vehicle. If so, you can re-negotiate the sale price with the dealer to ensure you are not overpaying for your new vehicle. We also work with you to ensure your payment is manageable while keeping the loan terms as short as possible to reduce the amount of interests you will pay over the life of the loan.

Also please keep in mind that once you enter into a loan contract in a negative equity position, St Francis FCU may not be able to refinance your loan.

To avoid being pressured into a negative equity deal, consider seeking a loan pre-approval with St Francis FCU. The pre-approval is good for 30 days to allow you to shop for your next vehicle.

For more information about this topic visit the Federal Trade Commission Consumer Information www.consumer.ftc.gov

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