When a customer walks in the door looking to purchase a new vehicle, they're also likely considering trading in their current one. It's possible their trade-in holds negative equity, which can be discouraging for a seller. However, a good dealership will be able to help guide customers through this challenge and into their dream car.
Here, we discuss what negative equity is, as well as ways to advise potential customers through the car buying process in this scenario. This way, dealerships can facilitate positive experiences and foster long term relationships with customers.
What Is Negative Equity?
Negative Equity is when a vehicle is worth less money than the amount the owner still owes on the vehicle. For example, if someone had an automotive loan with $10,000 outstanding, but their vehicle is only valued at $8,000, then their negative equity is equal to $2,000.
What Factors Result in Negative Equity?
There are several reasons why someone may end up with negative equity in their vehicle. Wear and tear is one primary factor. The amount of miles is directly correlated with a vehicle's value, so if many miles are put on the car in a short amount of time, the car would lose value faster. Damage to the vehicle can also impact its value. A car may have been purchased new, but if it's dented, scratched, or in need of a major repair, it's going to be appraised at a lower value.
Lastly, if a vehicle has been purchased for an amount greater than the vehicle’s value to begin with, the owner ends up with the negative equity mentioned above. This is a common occurrence during unique market situations, such as during the Covid-19 pandemic where used vehicle costs were higher than they had been previously.
How Can Consumers Deal With Negative Equity?
First and foremost, the best way to help customers and close the deal is to be informative and helpful in the equity discussions. Dealers should focus on the customer experience to get a long-term sale, rather than focus entirely on the equity factor. Knowledge of consumer options for dealing with negative equity is essential to helping through this process. Here are ways that consumers can help tackle their equity situation.
- Loan Rollovers: Some lenders may let borrowers roll balances into a new loan. This transfers the negative equity to the new loan, adding the balances together. While the equity stays the same, it combines with the new automotive loan and allows the customer to continue with acquiring their new vehicle. They’ll need to fully understand what the terms of the new loan are, such as payments and any changes in interests.
- Trade-In While Paying the Difference: Consumers can decide to pay the difference in negative equity when purchasing the new vehicle. To do this, they’ll need to get the appraisal from the dealership on their current trade-in value and pay the difference between that and the loan payoff amount from the current outstanding loan.
- Customers Can Wait Until They Have Positive Equity: It’s possible for a car owner to wait until their current loan is paid off so that they have positive equity. They may decide to make larger payments in order to pay the loan off faster and get their new car sooner. Once they have positive equity, they may feel more confident in purchasing a new vehicle. This is a good reason to give the customer a positive experience at the dealership so that when they are ready to buy, they’ll go back to the place that treated them well and helped overcome any challenges.
- Consumers May Have the Option of Selling Their Vehicle Privately: In some instances, this may give them an opportunity to get a higher value for their vehicle. This puts more money in their pocket, lowers their negative equity, and puts them in a confident position to make a purchase from your dealership.
- Help Customers Understand the Contract They’re Given: Transparency builds trust, and consumers that walk away from your dealership confident in their deal will be more likely to be repeat customers. Explain to the customer what their rates and monthly payments are, and any additional fees associated with their purchase.
- Understand the Customer’s Situation: Take time to fully understand what the customer can afford for payments, overall cost, and what they are looking for in a vehicle. By understanding what the consumer wants and can bear, you can more easily navigate any barriers including negative equity or reservations the customer may have.1
How Can You Help Consumers Avoid Negative Equity in the Future?
Dealerships can go above helping customers deal with their current negative equity. They can also help customers avoid negative equity with the vehicle they are currently working to purchase from the dealership. Here are a few examples of recommendations dealerships can make to their customers to avoid negative equity in the future.
- Recommend a Larger Down Payment: If a customer is able, a larger down payment of 20% or more can help negate or avoid future negative equity for a car purchase by reducing the outstanding loan balance relative to the car’s appraisal value.
- Recommend Vehicles That Keep Their Value: Different vehicles tend to depreciate at different rates. Since some vehicles hold their value for longer than others, one strategy is to recommend these vehicle makes and models. This helps improve the other side of the equity equation by keeping the worth high.
- Give Tips On How to Keep a New Vehicle in Good Condition: Since both aspects impact the value, dealerships can assure customers these actions will help preserve their vehicle’s value over time. This includes regular cleaning as well as preventative maintenance such as tune-ups, on-time oil changes, and timely repairs. This is also a good opportunity to bring customers into the dealership’s service pipeline.2
Where Can You Get Accurate Estimates?
A vehicle’s equity requires accurate vehicle value estimates. Get the most market-accurate estimates by using ClearCar. ClearCar combines real-time market data, cutting-edge artificial intelligence technology, and vehicle history reports to determine precise vehicle estimates. Data is updated on a frequent basis so that estimates are given for real market conditions.
ClearCar’s software also allows dealers to determine prices based on specific areas, so that pricing is accurate to the specific dealerships location and local market. Best of all, the software can be tailored to meet your specific dealership’s needs to streamline equity estimates, inventory needs, and ultimately increase profits. Schedule a ClearCar demo here.
Sources
- Miller, Peter (04/08/2024). Auto Buying: How To Deal With Negative Equity. REFI. (06/28/2024), https://www.cbtnews.com/three-tips-for-helping-trade-in-customers-with-negative-equity-sean-gardner-joe-verde-group/
- The Car Connection Staff (10/18/2023). Trading in a Car with Negative Equity. The Car Connection. (06/28/2024), https://www.thecarconnection.com/car-loans/finance-guides/trading-in-your-car-when-you-owe-more-than-its-worth/
