Negative Equity - A National Disease
Capitalism has many benefits in a free
society. It has inherent benefits to those who are
creative and willing to work hard. Nowhere else can
such a variety of people from many diverse backgrounds
and countries succeed by their own efforts.
However, sometimes our creative efforts
cause serious problems. As a people, we have become
enamored of things, possessions, and goods. We want
to own the biggest house, the biggest automobile and
other possessions without number. And for all the
things we say we want, there are manufacturers ready
and willing to provide them. In order to be competitive
these same manufacturers are always seeking better
ways to convince us that it is possible to own that
Cadillac El Mundo Gordo Magnifico SUV when realistically
we can only afford the Ford Sub-Midsized ordinary
Sedan. Desire for things, plus superb salesmanship
overcomes common sense and basic math. The result
can be what the subject of this article is all about.
Lets clear up a couple definitions.
Equity: The market value of a property
(house or car or whatever) minus any mortgage or money
owing on the property.
Example # 1 Positive Equity: You have
owned a house for thirteen years. Its market value
is $400,000. You owe the bank $225,000 over the next
seventeen years. Your equity in the house is $175,000.
This is positive equity.
Example # 2 Negative Equity: You buy
a house for $300,000. The housing market changes and
the market value drops to $200,000. You owe the bank
$225,000. Your equity in the house is $25,000. This
is negative equity and sometimes referred to as being
"upside down". This is a very bad thing.
Negative Equity occurs frequently with
automobile purchases. What do you do if youve had
the car two years and want to trade it in? The "upside
down" buyer frequently adds the amount on the trade-in
onto the loan for the new car. They also stretch out
the loan to keep the payments low. This is a losing
proposition as the longer the loan, the longer it
takes to reach a point where they owe less than the
vehicles depreciating value. It is a financial Catch-22.
How does this happen?
It is a combination of things. In order
to sell more cars, manufacturers offer deep discounts
on new cars. This has the effect of depressing the
value of cars, which coupled with five and six-year
loans means its going to take much longer for car
owners to achieve a position of positive equity. (two
to three years is not unusual)
It is a fact that the moment you drive
your car away from the lot it is a used car. If you
are paying $45,000, the Kelly Blue Book value may
be $40,000. If you still owe $43,000, theres a $3000
difference. How do you protect yourself if you have
an accident? Now the vehicle owner has more problems.
Gap Insurance
Why is an auto gap insurance policy
so important? Because standard comprehensive and collision
auto policies only cover your new car's "fair market
value". And that can be as little as 80% of what you
paid for your car, starting the minute you drive it
off the lot. This condition of negative equity may
exist for the first two or three years of ownership.
This means that if you're involved in
an auto accident that leaves your new car "totaled",
you could end up paying off a loan on a car that you
can't drive. This is where gap insurance comes in.
A gap car insurance policy insures you for the difference
between what you owe on your car and what your insurance
company says it's worth. In some cases this insurance
will be required as part of purchase or lease.
Gap insurance coverage would also become
critical if your car is stolen. Thieves prefer new
cars and they seek out specific models, which usually
happen to be the most popular models of cars sold.
(Honda Accord, Ford Taurus - etc. etc.)
If your car is stolen, the insurance
situation is the same as in the case of an at-fault
accident on your part: comprehensive insurance will
cover the value of the vehicle, but not necessarily
the value of the loan that you owe to the bank. You
could be stuck paying thousands for a car that's long
gone. Add that to the truly disheartening feeling
of having your car stolen, and that makes for a really
rough time.
As a Lemon Law firm, we see many situations
of negative equity when a case is being settled with
an auto manufacturer. Often it is the first time the
owner discovers the reality of being upside down on
their loan or lease. It is always painful. We certainly
could offer scads of advice about this situation.
The first piece of advice would be, never buy something
that is beyond your means. This advice will surely
be ignored over and over. The other thought, which
isnt really advice is, if you get caught in a situation
where your negative equity is going to be expensive,
bite your lip and promise yourself you will never
get in that sort of situation again. Its bad for you
and accepting these kinds of deals only encourages
manufacturers and their financial organizations to
offer these "good deals".
Donald Ladew, Staff Writer for Norman
Taylor & Associates, is a professional writer and
author of numerous articles on quality,customer service
issues and many other subjects. This article approved
by Norman F. Taylor Esq. For more information about
this most important subject, please read Lemon Law
- The Standard Reference Guide, Norman F. Taylor Esq.
ISBN 0-9760058-0-8 http://www
.lemonattorneys.com or http://www
.normantaylor.com For further inquiries, Mr. Ladew
may be reached at: donald@nor
mantaylor.com Phone: 818-244-3905.
