Buying a New Vehicle With Negative Equity: Using Research to Problem Solve

Problems come in many shapes and sizes, and often a person may face more than one problem at any given time that dictates the need to prioritize. Prioritizing allows a person to solve the most pressing problem first. To illustrate this, let us look at the following scenario. Alley is a young wife and mother who finds herself driving a vehicle that is fast becoming unreliable. Although the vehicle is only four years-old and has never been involved in an accident, it does have high miles and is beginning to burn between two and four quarts of oil between the 3000-mile interval oil changes. Additionally, Alley's family is quickly outgrowing the maximum passenger capacity that her vehicle offers.

There are secondary issues that are going to make replacing Alley's vehicle even more challenging. The high mileage and engine troubles present the situation of having a lower trade-in value than is desirable. Furthermore, although Alley has been actively paying more than the payment plan terms require, the vehicle still has some negative equity. Alley knew that she was going to need to replace the vehicle before it was paid off and that she had a high amount of negative equity, so, Alley has been doubling up on her payments (paying 2 payments each month) for the past year to pay down some of the negative equity. Alley knew that to be able to trade the vehicle in and get a good deal she would need to have the negative equity under $3000, any higher, and she would be in a worse situation, with higher negative equity or unable to make a trade at all.

These secondary issues necessitate the requirement of the "new" vehicle to already have equity in it. Negative equity is a difficult problem to overcome, but not impossible; however, Alley needs to take care that she does not make her financial situation worse. Typically, having negative equity in a vehicle means buying a new vehicle with the cash back option, but using a cash back option automatically means starting out in a new loan with an even higher amount of negative equity. This is a situation that Alley wants to avoid, and Alley is aware that this is a situation that a salesperson is going to push. Since a salesperson works off of commission, a new car sale equals more commission in the salesperson's pocket and more money out of Alley's.

The MSRP or Manufacturer's Recommended Selling Price is of little to no interest to Alley, because she has learned through the school of hard knocks that new vehicles are usually not the best option. New vehicles lose too much equity, starting as soon as it is driven off the lot, and it continues to lose equity every year so that it takes years of being upside down in a loan and trying to play catch up on the negative equity. When going into a vehicle with negative equity, Alley knows that she will end up with the situation she now finds herself in: trying to get the negative equity paid down enough to make a decent trade.

Additional things Alley has considered is with new vehicles, there are very few sources of information on how the vehicle runs; if there are any at all. Alley realizes that had she been able to do research on the vehicle she currently has, which she bought new, she would not have bought it, because the vehicle rates extremely low on consumer satisfaction surveys. Consumers have had enormous amounts of complaints about it, some serious, potentially life-threatening and some merely nuisance.

Alley decides that the first step she needs to take is to investigate her finances. She needs to check her budget to ensure how much money she will have to make a down payment and what payment range she needs her monthly payments to fall between. Also, there are a lot of calculators online that can calculate monthly payment based on the down payment, trade in terms, vehicle purchase price, finance terms, and interest rate for her.

Alley also needs to check her credit report and score to ensure everything is accurate so that she gets the best interest rate possible, preferably about 6 months prior to the vehicle purchase/trade. The 6 months are important in allowing enough time to get mistakes corrected on her credit report and allowing time for her credit score to reflect those corrections. Alley knows that the credit report and score are the window through which financial institutions view her creditworthiness. A low credit score means a higher interest rate or with extremely poor credit scores, being deemed too high a risk for financial institutions to take (i.e. no loan and no "new" vehicle).

The next step Alley takes in replacing her vehicle is to find its exact value by searching through the Kelly Blue Book. According to Men's Health (2009), if the dealer offers less than $500 off the private-party quote in the Kelly Blue Book, it would be a better financial decision for Alley to sell the vehicle herself, rather than use it as a trade-in. Alley can also use the Kelly Blue Book to determine if the asking price of the used vehicle she is considering buying is a fair one. Using the private-party quote on her current vehicle, she can then begin searching online for vehicles that local dealerships have on the lot that meet her functional and budgeting needs.

There are five major benefits Alley has by beginning her search online first:

* It reduces the amount of time she is exposed to high-pressure sales tactics that are so common and can be costly to consumers in the automotive industry.

° It reduces the total time spent physically sitting in the dealership by almost an hour and a half, according to Men's Health (2009).

° It simplifies the process of comparison shopping.

° It allows her time to investigate safety ratings, consumer complaints, and vehicle recalls on used vehicles that she is considering.

° She can begin the process of negotiating between different dealers to get the best price, since the first offer is never the best offer (Men's Health, 2009).

Equally important, Alley must check the financial institutions she banks with and get a quote from them, because, as she learned through past experience, even though the bank may give you a good rate, sometimes the dealership can beat the bank's best rate. However, just as often, the consumer can find a loan rate lower than what the dealership offers. Alley knows that just as shopping different dealerships for the best price on the vehicle she wants, she must also shop around for the best interest rate. Shopping around for the best interest rate needs to be one of Alley's final steps, because multiple credit checks by financial institutions will significantly lower her credit score. If, however, all the credit checks occur within a few weeks of each other in the purchase of a house or automobile, then the credit checks are counted as one credit check and have only a minimal impact on her credit score.

One thing Alley has learned is that everything is negotiable. Having a plan of attack is an excellent way to conquer any problem that presents itself, provided a person has enough time to formulate a plan. By following the research plan outlined in this article, Alley is conquering several problems that have slowly been forcing their way to the top of her priority list. The research included in this plan provides most, if not all, the information she will need to ensure that she gets the best deal to meet her needs, while minimizing her stress.