Question: How do I handle the payoff on my trade, which is more than the car dealer is giving me for my car?

May 13, 2005

Hello Tony

I love your website. It has answered many questions for me.

I do have one question though that I would like your help. I've been pre-approved from Capital One Auto Finance to purchase a new car for up to $30,000. The car I'm looking at will cost me between $21,000 - $23,000.

I want to trade-in my car that I still owe approximately $9,000 on. I will probably only get around $4,500 - $5,000 for it. How do I handle the balance I owe on it? Does this mean I have to come up with $4,000 - $5,000? I was planning on putting a $1,000 down payment. Help!

Thank you,

Marissa P.

Answer:

Hi Marissa,

First of all, we are talking about negative equity here. Negative equity is the amount you still owe on a trade after you subtract the trade allowance.

In your case if you owe $9,000 and you only get $5,000 then you have $4,000 in negative equity.

You'll have to add the negative equity to the price of the car so it doesn't actually show on the buyer's order when the salesman writes it up.

For example, If you're buying the car for $23,000 and you have $4,000 in negative equity show the selling price as $27,000, and the trade as $9,000 (even though they are only giving you $5,000) and the payoff as $9,000. Then show your cash down.

By raising the selling price and the trade allowance $4,000 each they cancel each other out (so you are still paying $23,000 and getting $5,000 for your trade), but on paper it looks like they are giving you your payoff amount for a trade allowance.

The numbers will work out as follows:

The selling price
plus sales tax and title fees
minus the trade allowance
plus the payoff
minus the cash down.

The reason I suggest this is because Capitol One will probably want a copy of the buyer's order along with other documentation. If they sent you a Blank Check there should be a list of documents the dealership has to send them.

You may or may not have to pay extra sales tax, but I'm not sure Capitol One wants to see negative equity on the sales order. You may want to call them first and ask them in general terms what their policy is regarding negative equity. Maybe they do allow it.

Bottom line is that you either come up with the extra cash or you roll the negative equity into the new loan. Either way you have to pay it. The latter is a very common practice in car dealerships.

They know how to get very creative with the figures - on paper - in order to hide the negative equity. A lot of banks don't want to see it, while some don't care.

One thing to remember though, If you move the figures around as I suggested above make sure you get a written promise from the Sales Manager stating that the money to pay off your loan on the trade is included in the deal . . . and also that they will indeed promptly pay it off.

It can get confusing, but dealers know how to do this. Just don't take anybody's word for it. Get it all in writing and be sure to go over the figures yourself to make sure the dealer's figures are correct.

All my very best...

Tony Iorio

Additional Comments From Marissa . . .

Thank you so much for your quick response. You're the first person that has spelled it out for me in a way I understand and trust. I will definitely recommend your website to all my "girlfriends" looking to buy cars in the future!

Thanks again!!!