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Upside down car loans are becoming the norm, but you’re in a unique position to change this trend.
2016 was a bad year for trade-ins. 32% of all trade-ins toward the purchase of a new car were under water, according to Edmunds. In other words, one-third of the customers buying from your dealership likely have negative equity on their trade-ins, meaning they owe more on the loan than the vehicle is worth. The average negative equity for those buying new cars is about $4,800, while those buying used cars have negative equity of about $3,600.
The 32% figure is the highest ever recorded. Why do so many U.S. car buyers have upside down car loans? It’s a combination of higher transaction prices, lower down payments, and long-term loans.
So many people in our country are in debt—so why should upside down car loans be your problem? When your wife goes clothes shopping, the cashier doesn’t ask her if she can afford what she’s about to buy. Likewise, if you go out for a steak dinner, your waiter doesn’t grill you about your budget or debt status. Why should you have to coach a car buyer through making better financial choices?
Because it’s the right thing to do. Behind buying a house, a vehicle is usually one of the biggest purchases a person will ever make. One small upside down car loan can snowball through the years and become a totally out of control upside down car loan. If you don’t call attention to the negative equity and help the customer finance a new vehicle, there may come a time when their credit becomes so bad, that you’ll lose them as a customer—because they won’t be able to afford a new vehicle again.
You’re the expert in this situation, and your customer may not even be aware of what upside down car loans are. You’re in a unique position to help them make a good decision and a purchase they can be happy with in the long run, nevermind that trust you’ll build by being honest.
Tips for handling customers with upside down car loans
Every situation you encounter is going to be unique, so there’s not a one-size-fits-all approach to helping customers with upside down car loans. For example:
- One customer may have $2,000 in negative equity but have 50% of the new car’s purchase price in cash. In that instance, it would make sense for them just to pay off the remaining $2,000 and use the rest for the down payment.
- Another customer may have $10,000 in negative equity and want to buy a brand-new car with a 72-month loan term. In that case, they may need a talk about realistic expectations —including how long they truly intend to keep the new car.
If customer has negative equity and paying it off right now isn’t an option, communicate the main choices that most buyers have. They could:
- Roll over the existing debt into the loan for their new vehicle.
- Choose a car with an incentive amount that might pay off the old loan.
- Keep the car they have for now and continue paying down the loan each month.
When you present these choices, be sure to share both the benefits and risks of each. You can’t make a customer do anything they don’t want to do, but you can arm them with everything they need to make an informed decision.
Once they make a decision, you can also share some tips for the future to prevent upside down car loans from being an issue again. Tell customers to: 
- Know their credit score and don’t pay an interest rate that’s too high
- Shop around for the best interest rates
- Do car pricing research, so you know you’re getting the best value
- Choose a loan length that matches your expected ownership length
- Save up a higher down payment before buying a car again
- Try the 20-4-10 rule. Put at least 20 percent down in cash or a trade-in, finance with a loan of no more than four years, and make sure the monthly expenses aren’t more than 10 percent of your gross income.
It may be tempting if you’re dying to make a sale and hit your monthly goals, but don’t just roll over negative equity into a car buyer’s new loan like it’s not a big deal. Be very clear about what you’re doing, why you’re doing it, and how it will potentially affect them—you’ll both be much better off in the long run.
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