Negative equity explained. The good, bad and the ugly
The phrase "Negative Equity" has been thrown around in the automotive industry quite often these days, especially with recent down turn in the Canadian economy. To the average consumer catch phrases like "negative equity", "upside down" or "buried" are completely meaningless. The consumers often are completely unaware of the implications as well as the consequences of negative equity. In a nut shell "negative equity" simply means the wholesale value of your vehicle is lower than the loan you currently owe to the bank. Negative equity occurs more often than you think, it will show up on any car loan unless you are less than 12 months away from paying off the loan completely.
Let's put the theory to practice, if you are financing a 2005 GM Cobalt from the dealer since new, despite the 0% financing interest rate, your outstanding balance maybe $8000. The vehicle may have low kilometers and never been involved in an accident. However market condition dictates the wholesale value on 2005 Cobalt can only reach $4000. In this case the owner will be responsible for the "negative equity" of $4000 if he or she decides to return it to the dealer.
Of course there are other options open to you which you can minimize your negative equity or loss. For one you can sell the vehicle yourself through Auto Trader, Kijiji, or Cragslist. You may ask for $8000 for your car and deal with the hassle of buyers knocking on your door and test drive your car. If you don't want to deal with the general public, you can also shop your resale value through other dealers. Call around your local GM dealer and let them appraise your vehicle to offer you a firm number for your trade in. Don't make the mistake of taking a "ball park figure" from a sales person over the phone, every vehicle is unique to certain degree, there is no accurate way of evaluate the vehicle's value without seeing it in person.
You should avoid refinance your negative equity at all cost; don't let the newer vehicle lure you into paying for two loans rolled into one. This practice is dangerous and the effect is compounded interest with compounded payments. If you have negative equity on your current vehicle and you is not having any luck selling the vehicle on your own. The best and the only thing to do is to wait, be patient don't rush into buying a newer vehicle because pretty soon you will be buried into your financing you may not be able to get out without declaring bankruptcy.
Author Rick Tao Li, for more helpful automotive financing articles please visit me online at http://www.soscarloans.com
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