Getting Out of Upside Down

Upside-down means you owe more on the car than it is worth. You may ask, "How can that be—" Easy. Let's say you buy a new car with for a price of $35,000. The various taxes, license and fees will add, as a rough rule of thumb, about 10 percent. The total is now $38,500. You write a check for a down payment of $3,000, which leaves $35,500 to finance. Over 60 months, depending on your credit rating and what sort of interest rate that allows, you will have monthly payments of, roughly, about $750, for a total of around $45,000. Add in the down payment and, by the time you're all done, assuming you keep the vehicle until it's paid off, you will have spent about $48,000.

How It Happens
But the car's depreciation curve drops more quickly than the payoff curve. As soon as you drive it off the lot, otherwise known as "taillights over the curb" in the business, it's going to depreciate. Somewhere in that time you're going to be in a spot where it's worth, let's say, maybe $22,000, but you owe, let's say, $27,000. At that point you are $5,000 upside-down.


So let's say that at that point you want to buy a new car. You decide to trade in what was new only a couple of years ago. Let's say the new car has a price of $38,000, and taxes and so forth brings it to $41,800. You think the trade-in is worth something. It is. It's worth $22,000. But you owe $27,000. That $5,000 negative equity has to be covered somewhere. So, you wrap it into the price of the new car, which means the cost of the new one is now $46,800. You write a check for $4,000 for the down payment. You finance $42,800 for 60 months. That is, roughly, something over $850 per month. Total cost of the new deal, over $55,000, for a new car that will be worth about $35,000, maybe, the instant the happy salesperson sees "taillights over the curb." The outstanding amount of your payments is $51,000. You are, at that moment, $16,000 upside-down.


That amount is not, by the way, terribly extreme.


Understand it's not the dealership's fault that you're upside-down. You put yourself here. It was you who decided to buy those cars, you who decided to trade them in when you did, you who signed the deals.