NEGATIVE EQUITY
FACT: Nearly 25% of new car buyers right now are trading in a car that is worth LESS than they owe (the average is $6,000 upside down).
Don’t be one of those!
If the bank will allow you 6 years…don’t take it. Pay it off in 5. If you can’t afford to pay it off in 5 years … you really can’t afford it.
Buy lower. Find a cheaper version of the same car, something without the chrome trim. Buy low-mileage used. Keep the car you have for a few more months. Save up a few thousand more for a down payment. Do SOMETHING nice for yourself other than signing up for increasing debt.
I’m on your side!!!
Paying off $1,000 more up front is magic. It saves about $250 in interest over 5 years. 25% more in your pocket instead of the bank’s.
If your equity is negative you really should not be looking for a different car. However, if you were foolish enough to buy an EV it is almost guaranteed that you are upside down. Pay it off and remember the lesson you just learned.
How to find out what you owe and what its worth…
What its worth is easy … look at trade in value for a vehicle with your optional equipment.
What you owe is as simple as looking for something called “pay off amount” on your monthly statement.
If the pay off amount is more than the value … forget buying a new car. You’ll come out of that deal owing money on a vehicle you no longer own. If you hate your car now, think how that will make you feel about it.
That’s not the only reason being upside down is dangerous. Your auto insurance company will not pay you more than the current value if there is an accident. In fact, depending on your state, they will “total” your car if the cost of repairs will be more than 60-99% of the value. (Michigan and Kentucky it is 75%, Nevada is 65%, and Oklahoma is 60%). Then what? Then you have to pay off the car with the insurance check plus $6,000 – 12,000 out of your own pocket. Then you have to find a different car…with WHAT?
Tools to prevent being upside down in your auto loan:
1. Don’t buy an EV or other expensive vehicle.
2. There is a formula available. It is called the “20/4/10 Rule.” Put 20% down, and spend 10% of your income on automobile costs (the loan payment, maintenance, gas, and car insurance). What does this mean? Simply if you are earning $35k you can only afford an average of $290 per month to pay the loan, get gas, and pay your insurance premiums.
3. There is another formula which says you should not buy a vehicle which costs more than 50% of what you (the person driving the car) will earn in a year.
4. The best way to do a 20% down is to trade in a paid off car.
5. Save up an extra 20% for your emergency fund. You will need that if you have an accident that robs you of your wheels.
“The 20/4/10 rule” is how you live honest in your budget. It is also how you prevent being under water in an auto loan. If you need more income to pay for a car then maybe you should work a second job or give up coffee shop coffee. (I bought a coffee shop coffee recently: $3.36. For the same amount of cash I can make a cup of instant coffee at home every day for 40 days. Aldi instant coffee costs 8 cents per cup and believe me you can grow to like it).
The 10% part of that rule will still allow you to buy above your level if you are willing to save up more money for the down payment. What would happen if you put 40% down on a $30,000 vehicle? That would put you out $12,000 in cash + trade but would lower payments by about 25%.
Let’s be clear, anything with a motor is a hole in the ground you throw money into. Therefore, it is wise to throw the least money possible into that hole. Always chose one that will last long and get you lots of miles for low repair/maintenance costs. You are not buying a vehicle, you are buying MILES. This is something I taught my kids. A cheap used car is usually a bad deal. A new car that starts to fail at 120,000 miles may be a bad deal. A new car should get over 200,000 miles to be worth your money. So, a $40,000 car (purchase price) that gets 200,000 miles without major repairs only costs 20 cents per mile whereas a junker that costs $7,000 but only gets you 25,000 miles will cost you 28 cents per mile. The junker miles in this case cost more. Remember, you are buying miles (Which is THE reason leasing is a very poor choice; you are paying a premium price per mile.) Gas mileage and insurance premiums add spice to the equation.
Its not a bad idea to check your value to loan at least once per year. If the vehicle is sinking you probably should find some money to give it buoyancy. The risk is too great.
Copyright 2025 Donald Whelpley
[PLEASE NOTE that Don is always open to discussing the thoughts and opinions he shares here and welcomes comments as shared in the comment section. He doesn’t use other social media platforms and won’t see whatever you’d like to share with him if you post it elsewhere.
ALSO, Don is always open to offer his thoughts on various topics. If you have a specific request, you can let him know in a comment; he reads – and replies to – them all. ~ Sherry]
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Cost of buying vs Leasing. Cost per mile.
Nissan Murano SL Buy over 5 years = $57,444. Drive 150,000 miles. Cost per mile = 39 cents
Nissan Murano SL Lease for 39 mo = $22,560. Drive ~ 32,500 miles. Cost per mile = 70 cents
You would have to lease over 4 Muranos to get the miles of purchasing one. ~$90,000+. When you think of it that way you can see that leasing is a very bad deal.
A lesser reason (still good for the wallet) for buying is this: When you trade in that 150,000 mile vehicle you get MONEY BACK. Likely more than $15,000 if it is in good shape. That’s 10 cents back per mile. Now the difference between buying and leasing a Murano LS is 29 cents vs 70 cents per mile. Ouch! No wonder you never get ahead!