Are You Upside Down on Your Car?

A friend of mine spent several years working for a prominent local car dealership in the area, and though I’m not a “car guy”, I got a chance to learn about some of the inner workings of the business from a guy who was living it. And that’s what they do in the car business, by the way—they live it.

If they’re in sales or financing, they’re on the job from the moment the store opens until past closing (there’s always a lagging customer or paper work that needs to be cleaned up). If they’re serious about the business, they work at least six days a week, and rarely take vacations.

Looking at the schedule this guy kept, the first thing I learned about the business was that I didn’t want to work in it. I had a life, and I wanted to keep it.

But the second thing I learned was a curious phrase he often referred to: upside down. If you’re not familiar with the term, it refers to a customer who owes more on his or her car than the vehicle is worth.

Now in my simple mind, this customer looks to be the worst type of prospect a salesman or finance manager can run into. It looks like a clear case of customer-dead-on-arrival, right?

Hardly. The car dealerships LOVE these people!

Why the upside down customer is the BEST customer

If you’re over the age of 18 you probably already know that things aren’t always what they seem, and such is the case with the car buying prospect who’s underwater on his car.

Now I’d look at such a person and say “negative equity—pass—next victim, er, customer”, but that’s yet another reason why I’m not in the car selling business, and would have no hope of surviving if I ever decided to take a shot at it.

In the car selling universe, this kind of prospect is one of the ones they like best and for the simple reason that this customer doesn’t know what he’s getting into. After all, if he did, he’d have no interest in buying another new car until he’s right side up on the one he has. But that takes patience, which is another key quality the upside down buyer lacks, making him still more desirable as a customer.

The car buyer who’s upside down on his car is an uninformed buyer; he’s making his buying decision based purely on emotion. A new car. The new car smell. “Wait until my friends see my new wheels”. Dollars and cents be damned, I’m getting a new car!

Have you ever known someone like this? Have you ever been someone like this?

Part of what get’s this buyer into trouble in the first place is the singular obsession with the monthly payment. This is another tidbit I learned from my new car dealer friend. The customer doesn’t care what the car costs in total, isn’t terribly concerned with the interest rate he’s paying or the value of his trade in, all he wants to know is “what’s my payment?” He figures that if he can manage that, the other details will take care of themselves.

In a way, he’s right—the other details do take care of themselves, only not in the way the buyer thinks.

All the salesman and finance manager need to do with this customer is get the monthly payment right, and they have another sale. What’s not to love about this guy?

Double jeopardy: upside down Part II

But the worst of all for this buyer is what happens next: he buys another new car and the hole gets even deeper.

Being a non-car guy, I never imagined that there’s a place for an upside down customer in a dealership but there is. The dealer is able to take the deficiency the buyer has on his current vehicle and “roll it over” onto the loan on the new car. In short, the dealer will accept the buyers’ current vehicle as a trade in for the new car, negative equity and all, and the buyer will drive out of the showroom with a new car—one he’s already upside down on!

It’s easy to see why upside down buyers are such great customers, they come back again and again for the same deal.

How do you know if you’re upside down? Compare the loan balance on your car with the value of the car, which you can get from Kelly Blue Book; if the loan is higher than the car is worth, you’re upside down.

What should you do if you are?

  1. Don’t even think about buying a new car!
  2. If you have the cash available, pay the loan balance down to an amount equal to the car value
  3. Make and/or accelerate the loan payments on your car until it’s fully paid

#3 is especially important; by paying the car off completely, you break the cycle of being upside down once and for all, and restore yourself to a position of bargaining power on your next purchase.

If you’re the type who gets bit by the new car bug more often than most others, think of this as a valuable time-out period when you get the opportunity to wipe the slate clean and restore sanity to your finances—at least the part that involves your car.

Do you know if you’re upside down on your car right now? Would you consider buying a new car, if the dealer could work something out for you?

19 Responses to Are You Upside Down on Your Car?

  1. My sister worked in a law office in high school basically repossessing cars from people who were upside down and couldn’t pay their monthly payments. Even after the car was repossessed, they were still on the hook for the difference. That is why we pay cash for our cars.

  2. Nicole – Yes, that’s absolutely true but I don’t think many people know it. That’s why being upside down on a car is more serious than people tend to think. Some get so comfortable with it that it becomes a way of life, until something happens that forces them to face it head on, such as a call from your sisters law firm.

  3. We try to pay cash for our cars, so we are not upside down. However I am sure they have depreciated greatly!

    We do buy new cars. With employee discount pricing, the cost of the new car isn’t much different than if we bought a used model that has some miles on it. In other words, the difference in cost isn’t worth not knowing the history of the vehicle. In those situations, the car price is pretty much pre-set and the salesman really doesn’t have much work to do, besides showing you around. If we didn’t have employee pricing, I would probably go used for sure.

  4. Everyday Tips – Paying cash takes the upside down factor out of the picture, in addition to giving you real strength at the bargaining table. Unfortunately, most people can’t pay cash unless they buy a used car–which is still better advice for a lot of people.

    The problem for the average car buyer is that once you step into the dealership you’re instantaneously over matched. Not only are you facing the sales person, but also the sales manager and the finance manager. Unless you come in with a position of strength, which includes equal or superior knowledge, you’re walking into as situation where the deck is stacked against you. Of course if you had equal or superior knowledge, you wouldn’t be an average buyer!

  5. Paying a car off completely will require people to keep a car for much longer than they do now. I don’t what the average length of time folks keep cars, but it’s got to be around 3-5 years. When that’s the case, it’s difficult to pay them off and be “ahead” of the car game.

  6. Jason – I think you’ve hit on the main problem that keeps the upside down where they are. They take 4-6 year loans, but turn the car in every 2-3 years, so their always behind. Even if they made a bad deal up front, they could get out from under just by staying with the car they have and waiting until they pay it off before buying a new one.

    They’re active buyers (every 2-3) years–another reason the dealers love them!

  7. Very sad to see these people being a target. This another common reason dealers use to promote gap insurance, which is another way they take advantage of the under-informed.

  8. CNC – Customer ignorance is a salesman’s best friend. In truth if a customer isn’t sure of what he’s doing, he needs to either avoid buying or get a trusted someone else involved who knows what he’s doing. We’re probably looking at a ignorance, lack of patience and pride here. With all that going on a buyer has to come up on the bottom of the deal.

  9. I bought a carin April and I am not very happy with it. THe car cost about 20k and I put down 7k. I would like to trade for something that I like better. Im not upside down per say but I do have more invested in the car than i will ever get out of it. The payoff is 12k and the trade in value is 14k. If I trade I will save about $115.00 a month in gas but I dont want to get in a worse situation. Any advice?

  10. Wes – This is just an opinion OK? I don’t know that there is a textbook way to handle getting out of a car purchase so quickly after buying, but here are my thoughts…

    The biggest hit you take as far as depreciation is at the very beginning. That is to say that the worst time to get out of the deal is right now. Can you hold onto the car for a couple of years and pay down the loan until you have some equity? Would you even need the equity from the car to make a down payment on another vehicle?

    Your situation is complicated by the $115/mo in what I presume are extra gas costs, over what you’d pay for a different car?

    You’ve already taken a loss on this deal no matter what, so maybe the best advice right now is to take some time and try to engineer a more favorable trade in situation down the road.

    I don’t know if that will help your situation any, but options are few once you drive the car off the lot. I’d talk to anyone you know who might be able to offer some concrete suggestions, then take the best route you can.

  11. Hi Kevin,I don’t consider my self an “upside down” person on my car. I know many me people that does it though. I have a friend who has an auto repair place in my hometown. He’s agree that upside down customers are the best, specially those who like racing. However, as many say in the comments, many car sellers abuse of these people.

  12. Stumbling upon your great post more than a year later. Very interesting. We pay cash for all our cars but, FYI, paying cash doesn’t actually give you much power at the bargaining table, contrary to popular belief and your comment to everyday_tips, Kevin. The reason being that the dealers make a crapload off of cars you finance through them. They prefer this to cash buyers or those who have secured financing elsewhere, and are usually more willing to bargain on a car they are financing because they know that what they don’t make off the sales price they will more than make up for in commissions/kickbacks/etc on the financing. For this reason, it’s smart to not mention that you are a cash buyer until you’ve negotiated the terms of the car.

  13. And even if you don’t mention you are paying cash until the last possible minute, many dealers will try to tell you they can’t honor the deal you made if you’re paying cash. We have always been able to pressure them right back to honor the deal, but it can be a pain. Sometimes, we have considered taking the financing, so long as there is no prepayment penalty, and paying the loan off within days, to avoid the hassle of dealing with a dealer who tries to pressure us into not paying cash, simply as a way to get the best price on the car (as they know they will make more money via the financing kickbacks) and waste as little time possible.

    We are in the market for two new (or new to us, depending on what we decide) and we’re paying cash as we always do, but may employ the “take financing and pay off right away” tactic I described. We’ll see.

    Thanks again for the interesting post. I had no idea most people are only concerned about how much their payments will be! Pathetic. IMO, the schools do a very poor job teaching this kind of financial “life skill” and ( think we really should teach kids this sort of thing. Many parents don’t teach it either, or lack the knowledge themselves, which is why I think the schools should teach at least the basics.

  14. Hi Veronica–I think your last point makes it, don’t mention you’re paying cash until you settle the price. Still, I think that the buyer who doesn’t NEED a loan is seen as a strong buyer, and that’s worth something. After all, not everyone can qualify for the loans to begin with.

    And on the payment thing, that is very true. I saw it first hand in the mortgage business for many years. People overpaid for loans (and were more than willing to do so) in exchange for a lower payment. That was all that mattered to most people.

  15. I would add that if you are paying cash, never hesitate to walk out and go to another dealership.

    Also, try going at the end of the month, some places will need to make their monthly numbers (and some won’t).

    Always avoid buying the hot new models that have just been released. You have much less room to negotiate vs the model that has been out a while. You can check on the internet to see how many months supply of a car is in the dealership pipeline.

  16. Hi Sam – I completely agree with all three suggestions. I even wrote a post about walking out of the dealership. It’s your most effective negotiating tool. The dealer will see it as money walking out the door.

  17. OMG! I made every mistake you mentioned 3 times – Wow, what a moron I was. I finally wizened up and paid cash for the last one – 11 years ago. It’s still going strong and I will NEVER pay anything but cash for a car again (and not tell them that until they’ve given me the details!) Great article for those of us who were just too stupid for their own good.

  18. How is that legal?
    The car is worth 20000 and they charge the buyer 40000. That is upscaling retail which is against the law, right?

  19. Hi Jackie – I’ve never seen a situation THAT bad, more like owing $24,000 on a car worth $20,000. But it happens all the time, so yes, it must be legal. When I was in the mortgage business they allowed mortgages as high as 125% of the value of a property, so the idea isn’t new. Of course, that was one of the factors that led to the financial meltdown, so you’d think they’d learn. But no, lenders will continue to do this stuff until a law is passed that prohibits it. Naturally one of the reasons there is no law is because negative equity allows car dealers to sell more cars, and that’s good for the economy and for the tax collectors across the country. So it becomes a game of “hear no evil, speak no evil”, reality be damned.

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