Dealer Fraud

Down payment is the amount paid by the customer that covers a significant part of the actual cost. This amount is deducted from the actual cost and loan is taken to pay the remaining cost. Interest rates on such loans are greatly influenced by the down payment. This situation is true even for cars. However, one needs to be wise while making a decision on how much down payment to be made while purchasing a car.

While buying a car, a customer is expected to shell down at least 20 percent of the vehicle cost towards down payment. This strategy is quite beneficial as it ensures that the buyer is not “upside down”, meaning that the buyer is not owing more than the actual value of the car. Being upside down is not financially beneficial as the buyer would end up paying an amount that is higher than the car worth. Also, the car would have a negative equity or fetch less value when one wants to trade in his old car to a new vehicle. When a customer makes a 20 percent down payment, he would be the one dictating financial terms. In these situations, buying or trade-in of an old car would always be at the discretion of the buyer.

While taking a car on lease, an entirely different strategy works out. “Cap cost reduction” is the term used when down payment is made while leasing out a car. With the intention of lowering monthly payments, many times people make a down payment of at least $3,000. In times of an accident, this down payment is taken as the coverage for the car damage and is not refunded. There is no chance of getting this money even if the customer has a collision and gap insurance. Hence, it is not advisable to put money on the car that is being leased out. Since, leasing does not require any down payment, the amount that was intended for such purpose could be saved in a bank account. Customer would be in a favorable situation if he is ready to make higher payments and roll the drive-off costs into monthly lease payments.

GAP Insurance, also referred to as GAP Waiver or GAP Addendum, is an abbreviation for Guaranteed Asset Protection. In the event your insurance company declares your vehicle a total loss from accident or theft GAP Insurance will pay the difference between the ACV (Actual Cash Value) your insurance company determines they will pay and what is owed to the bank on your vehicle. An easier way to explain this is that GAP Insurance will pay your negative equity (difference between your vehicles ACV and what is owed to the bank) so that you are not responsible to pay the bank, potentially thousands of dollars, on a vehicle you are no longer able to drive. Most GAP Insurance companies will also cover your insurance deductible and may give you additional money to use as a down payment on a new vehicle.

The ready availability of longer-term auto financing, car loans that are 48, 60 or even 72 months, means that it will take longer to get into an equity position with your vehicle. He also points out that, just because you get into a negative-equity situation with your car loan, it won’t necessarily affect your overall credit score, but it could affect your purchasing power, and it could impact the auto loan rate you get for your next loan.

Extended-term financing isn’t necessarily a bad thing. It all depends on buying habits. That might be OK for the consumer who likes to keep vehicles for extended periods, and that’s certainly a stronger option for all consumers, because of the ever-improving quality of vehicles. It does improve affordability, and as long as it matches up with the trade-in frequency, then they’re perfectly fine and it will work very well for them.

If you’re a consumer who likes to purchase a new vehicle on a fairly accelerated frequency, say 24 to 36 months, then that extended financing may mean that you end up with negative equity when you go in to trade your vehicle.

We all know what it means to be upside-down in the physical sense. The blood rushes to your head and it’s hard to breathe, all because it’s not the natural state of the human body. In vehicular terms, being upside-down is a completely different, yet equally unpleasant phenomenon. When it comes to your car, truck, minivan or SUV, being upside-down in your car loan is not a physical problem, but a financial one.
In car dealership slang, it simply means that, late in the life of your auto loan, you still owe more money to your car financing organization than the vehicle is now worth.

Here’s an example. You buy a $30,000 car with $2,500 down, finance it over a common 60-month term, but in three years you decide you want to sell it. Your payoff on the auto loan is $18,000, but your car is only worth $15,000 at this time. This means you are $3,000 upside-down, because in order to pay off your original auto loan, you would need to make up the difference between what your car is worth ($15,000) and what the car loan payoff is ($18,000).
Being upside-down in an auto loan isn’t all that uncommon these days, although there are no published industry figures. Jim Moynes, vice president, automotive marketing for Ford Motor Credit Company, one of the world’s largest auto finance companies, says that “negative equity,” or being upside-down, depends to a great extent on how you structured your purchase in the first place.
He says, “A large portion of the vehicle’s depreciation occurs in the first two to three years of ownership, regardless of make or model. Loans amortize over the term of the loan you took out, and typically there’s a period there where the depreciation outpaces the amortization. When you’re in that period, you’re in a position where you have negative equity. Once your amortization crosses over that line of the depreciation curve, which typically flattens out as the vehicle gets older, you get back to equity.”

You may not realize that the salesperson usually tells you that your trade-in vehicle is worth less than it really is and a lot less than you think it is. They may even tell you that it’s got what they call “negative equity“.
That’s a term car dealers invented when they had to come up with some way of explaining why your car wasn’t worth what you owed on it when you wanted to trade it in, but they didn’t think there was enough profit in it for them to take it off your hands. “Upside down” or “in the bucket” are similar terms.
These terms can be used to play games with the buyer in order to literally steal the trade-in vehicle, by taking it in for trade but taking the payoff amount and tacking it onto the price of the car that the customer is buying.
Tip: Defend yourself by knowing for sure what your trade-in is worth and finding out what your loan payoff really is. Don’t take the dealer’s word for it. Know before you go. Check trade-in values online. Look in newspapers to see what dealers are selling your kind of trade-in vehicle for. The more you know, the better prepared you are to keep from getting ripped off. And above all, be careful thru each step of the process.
Remember: the dealer’s objective is to get the money out of your pocket and into their’s. Your objective is to keep as much of your money as you can!

Negative Equity/Over-Allowance arises in a transaction that includes a trade-in vehicle. Generally, the customer is led to believe that the dealership is valuing the trade-in vehicle at the same amount that’s owed (so that the customer doesn’t appear to owe anything on the trade-in). In reality, however, the actual cash value given by the dealership is less than the amount owed, and the difference is added to the cash price of the vehicle being purchased. If this is done it is illegal, even if the customer knows and agrees to it.

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