The Negative Truth About Negative Equity

We’ve all been there- you’re getting your car serviced and the service advisor asks you if you’d be interested in trading in your current car for a brand new one. You look around and those new 2020 models are looking pretty good, plus you deserve a new car anyway, right? You end up trading in your old car, and lucky you, the dealer rolled what you owed on your old car into the financing for the new car. What could possibly go wrong?  

Weeks go by and you start having issues with your new car. You end up taking it in week after week, and the dealer can’t seem to figure out what’s going wrong. You talk to the manufacturer and great news- they’re willing to buy your car back under the lemon law! Things seem to be going as well as they could be going, until you get the buyback offer from the manufacturer. They want YOU to pay THEM to buy back your brand new lemon?! What kind of justice is this?  

That’s the scenario that has plagued so many consumers for decades. The Song Beverly Consumer Warranty Act, aka the California lemon law, requires manufacturers to buyback defective cars if they are unable to conform them to warranty within a reasonable time or reasonable number of repair attempts. Buybacks entail a return of your down payment, payments, and loan payoff. However, buybacks do not include any “extras” like your prior debt on your trade in, also known as negative equity or being “upside down” on your loan. This means you have to pay the manufacturer back for paying off your prior loan at the same time they’re paying you back your down payment, payments, and loan payoff.   

Here’s a real life example of this (names have been changed):   

Jane Doe owned a 2018 Toyota Tacoma for about a year before she saw the new 2019 Tacoma and fell in love. She went to the dealership and lucky her, they were willing to accept her 2018 Tacoma as a trade in for her to purchase the 2019 Tacoma. Since she had only owned the 2018 Tacoma for a short time, she still owed $36,600.00 on her loan. The dealership valued her trade in at $26,500.00 which left her with $10,100.00 of negative equity on the new loan for the 2019 Tacoma. She put $2,000.00 cash down on the new truck and buying a new truck, she wanted to make sure it was well taken care of so she purchased a $3,350.00 service contract, another $895.00 service contract, a $995.00 debt cancellation agreement, and a $995.00 surface protection product. Two weeks later her brand new Tacoma had major transmission issues which resulted in her truck spending more time at the dealership than with her during those first two months of ownership. Not being able to fix her truck, Toyota stepped up and offered to buy her truck back. When she received the buyback offer, Ms. Doe was shocked. The offer had her owing Toyota over $12,000.00 for Toyota to buy her defective truck back! So in order to get her new loan paid off of approximately $65,000.00, Ms. Doe would’ve had to pay Toyota for the negative equity ($10,100.00), the service contracts ($3,350.00 and $895.00), the debt cancellation agreement ($995.00), and the surface protection product ($995.00) from the lemon. In addition, there was a modest mileage offset she would also have to pay for to compensate Toyota for the trouble free miles she had. Unfortunately at the time of the offer, Ms. Doe hadn’t even made her first payment yet so her options were keep this truck that is unrepairable, or come up with over $12,000.00 to pay Toyota back for the negative equity and additions just to get Toyota to pay off her loan and take her truck back.  

So what’s the lesson here? Don’t spend money you don’t have. Even the most reliable manufacturers inevitably have lemons, and if that happens to you, you want to make sure you’re in the best position to protect yourself. Negative equity is the biggest killjoy because it can completely negate your down payment in some circumstances, and in the worst case scenario as described above, it can keep you from the justice the lemon law can provide.  

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