Upside Down On Your Vehicle: How To Turn It Around

Posted on October 5, 2009

FINANCE & LEASING: The brutal recession has rendered some operators upside down on their vehicles, with the outstanding loan or residual exceeding the value of the vehicle.

A few years ago, you rarely ever heard the term "upside down" as it pertains to auto loans. Today, you hear it too often. Being upside down in your vehicle means that you owe more on it than you would be able to get for it if you sold it or traded it in. Basically, if you truly need to get rid of your vehicle, you will need to take money out of your pocket to cover the difference of what you still owe over the price the buyer is willing to pay. Being upside down means that you will need to pay to get out of your vehicle.

Don Coolbaugh, vice president of sales for Advantage Funding, Inc., says, "Due to the economy, there is a lack of demand for limousines and market value of commercial vehicles has sharply declined. Combine that with improper lease and finance terms used the past several years and the result is many operators owe the bank more money than the vehicle is worth when they want to trade it in. Many banks with little knowledge of our business made what looked like favorable terms for customers, such as $0.00 down, lengthy terms with low payments in effect starting their clients behind the eight ball. They never made it back since commercial vehicles depreciate much quicker than their loans amortized."

This situation has become exacerbated because the market for used vehicles has become smaller, especially used limousines. This is simple Economics 101 folks; when demand drops, so does price. 

Tim McLaughlin, Limousine Leasing Agent for Jake Sweeney Auto Leasing, Inc., says "The limo market now is a buyers market with prices and values down.  That is what is really hurting the industry now especially for manufacturers. Operators are using their older vehicles or they are taking them to get refurbished to run longer through the tough times."

If nobody wants your car, you won't be able to get rid of it at top dollar regardless of what great shape it's in. If the market has too many vehicles up for sale, it becomes a buyers market and the buyer can essentially name his price. With the current economy, being upside down is far too common in the ground transportation industry. Being upside down is only a problem if you decide you no longer want the vehicle or can afford the payments.

Tips To Avoiding Getting Upside Down

  • Down payment:  If you are buying a new vehicle, try to make a substantial down payment to both keep your payments lower and to avoid being upside down in the vehicle. Although low or no down payment loans look attractive, at the end, you will also have nothing to show. "Higher payments and a shorter term could avoid this situation in the first place", advises Coolbaugh. "Most of our larger and well established customers have always used large down payments, most commonly 25% down along with the shortest term they were comfortable with."
  • Real life cycle of a vehicle: If you only intend to run your vehicle for three years, don't spread your payments out over 10. Finance your vehicle for the period of time or less that you intend to own it. 
  • If the payment seems too good to be true, it probably is.
  • Think about used
    • New cars depreciate immediately when taken off the lot
    • Used cars are already depreciated
    • There are bargains to be had with used. "All lenders are flush with repossessed inventory and are making deals in liquidating it. Don't hesitate to contact your lender's repossession department to see if there is something in their inventory you can purchase at a bargain price," Coolbaugh says. 
  • Avoid linking loans on vehicles. Coolbaugh cautions, "Multiple vehicles on one loan agreement always causes problems if you want to payoff one unit only. Try to keep one vehicle per contract if possible."

What To Do If You Are Upside Down

  • Stick it out until the vehicle is paid for or you can break even getting out of it
  • Try selling the vehicle yourself rather then through a dealer.  Every time you add layers to the process it takes dollars away from you.  Dealers can make the process faster but there is a cost involved.  Dealers do take away much of the legwork that you will now need to assume if you are doing it yourself. Typically if you sell the vehicle yourself you will save between $500 and $2000 depending on the dealer you are working with along with the dollar amount of the vehicle.
  • Consider trading in but avoid assuming or rolling the leftover debt into the new loan. This just keeps the cycle going by creating a cycle of debt that is extremely hard to get out of.
  • Consider refinancing the vehicle. This is a good consideration if you are happy with the vehicle but you just can't manage the payments. Finance companies lose money when they repossess vehicles. They don't want to have to do this. By explaining the situation and working with your finance company, you could create a situation that is more manageable for both of you. "Refinancing of units is at an all time high and a good lender should make this process an easy one. We suggest that you remain current at all times so opportunities like refinances or deferrals are an option for you,"  Coolbaugh explains.
  • Avoid repossession. The worst thing that can happen is that your vehicle is repossessed. You will more than likely not only wind up with bad credit but you will probably get a bill from your finance company for legal fees and the money still owed after they sell the vehicle at a bargain pricew

"The next time your lender asks for a down payment on your next vehicle don't run for the hills but understand that they might just be saving your financial life. Staying ahead of the depreciation curve will let you sleep much more soundly at night in addition to giving you many options during the course of the loan/lease. Selling it, trading it or building equity in the vehicle you just purchased can be done at any time," advises Coolbaugh. "By the way, since most companies don't own the buildings they reside in, the biggest asset they have is their vehicles. Equity isn't a bad thing to have."

— Linda M. Jagiela, East Coast Editor


Related Topics: equipment financing companies, fleet financing, leasing companies, leasing contracts, loan defaults, vehicle financing companies, vehicle leasing

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