Question: How do I trade a car to a dealer when I owe more on it than they are giving me on trade?

May 13, 2005

Tony,

I love your website. It has answered many questions for me. I do have one question though that I would like your help on.

I've been preapproved 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 $4000 - $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 than 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. You also add the same amount to the trade-in allowance. This balances them out.

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, the trade as $9,000 and the payoff as $4,000. Then show your cash down.

They are selling you the car for $23,000 and giving you $5,000 for your trade. This means that they are trading with you for $18,000 "difference." By raising the selling price and the trade allowance by $4,000 each you're still trading for $18,000 "difference" but it looks better on paper to the bank.

The numbers will work out as follows:

   Selling Price
+ Sales Tax and Title Fees
- Trade Allowance
+ Payoff
- Cash Down
___________________________
= Amount Financed

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 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 in which case you don't have to worry about raising the selling price and the trade allowance.

Bottom line is that you either come up with the extra cash or you roll the negative equity into the new loan. 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.

All my best to you....

Tony Iorio