Where car owners are concerned, the value of their car is often tied to its trade-in value or what they can get for it. Although a car is worth a lot more than just the amount that can be made from repairing and selling it, it’s still a good starting point for determining how much a car is worth in trade. The problem comes when the trade-in value of the car is less than what you still owe on it. This is known as negative equity. A lemon law lawyer San Diego CA talks about negative equity in lemon law cases.
You might never have thought about the negative equity issue until you’re on the verge of purchasing a new car. When you trade in an old car to make the purchase (either through government-sponsored arbitration or court) manufacturers will often assert that they are not liable to pay back to you the negative equity from your previous vehicle. In other words, you may be able to get rid of your current lemon by trading it in, but you could end up still carrying the negative equity from your old car.
Are You in a Negative Equity Position?
Car dealers often tell customers that their car has negative equity. This misinformation is a way for dealers to take advantage and make more money. Before you go shopping, it’s crucial to know how much your car is worth and shop around for the best price you can get. You can get three values online:
- Private party, and
- Suggested retail
If a website or local newspaper doesn’t have the values you’re looking for, you can check on other online sources like Autotrader or Kelley Blue Book.
The trade-in value of your vehicle is calculated by taking into account the current market value of your car and factors like the age or condition of the car, mileage on the car, and the amount of time left on the car loan. If you know how much you owe on your car loan and how long it has left to go, you can deduct that amount from the value to calculate how much you’re actually negative in equity. If you know this figure, it will give you more power when shopping for a new or used vehicle.
Importance of Negative Equity on a Lemon Law Claim
Car problems can happen, but if you have an issue that qualifies for California lemon law, you should know your rights. In the case of a California lemon law repurchase, the manufacturer must refund you the “actual price paid or payable by the buyer” which includes all payments made up to that point:
- Your down payment
- Monthly payments
- Registration fees, and
- Any other fees on the purchase or lease agreement
If the negative equity on a car is considered as part of the purchase price paid for the vehicle, it’s a heated issue for car manufacturers and consumers rights activists. The consumers would argue that the debt should be part of the purchase price because there is no way for them to get their trade-in vehicle back and it’s not their fault the vehicle is a lemon. Manufacturers argue that the debt should be deducted from the purchase price because paying off two cars due to one lemon would be beneficial to the consumer.
How to Prevent Accumulating Negative Equity?
You’ve created a negative equity situation for yourself, it becomes really really hard to get out. There are some simple ways to stop it before it takes hold, though. One, don’t buy a car that you can’t afford. Two, keep the terms of your loans as short as possible. A long-term car loan will almost always put you in a negative equity position and that could cost you big time in the long run.
The difficult choice can come when deciding between financing with the dealer, your bank, and your credit union in order to buy the perfect car. Understanding what options you have before you walk into a dealership is crucial. Make sure you talk to representatives of your bank and credit union before visiting a dealership. Then when you get to the dealership, make sure to negotiate the sales price separately from any finance offers.
The California Lemon Law on Negative Equity
In California, there is no case law that specifically addresses this issue. It’s likely that neither the plaintiff’s attorneys nor the defendants have found the right case, or want to put this issue before the court at the risk of creating unfavorable law. A longstanding rule in California prohibits manufacturers from deducting negative equity as a repair cost. It may not govern courts, but it should be enforced in lemon law arbitrations, as the Department of Consumer Affairs audits them for compliance.
- If you win the arbitration process, the manufacturer cannot deduct for negative equity. If a decision is made, it’s the responsibility of both the State-certified arbitration program and the manufacturer to make sure you’re repaid.
- Negative equity is when your car loan balance outweighs the market value of the vehicle. Manufacturers may not deduct this amount at arbitration and must return it to you. When reviewing calculation worksheets, the program must let the manufacturer know if they made an unallowable deduction, such as negative equity.
Negative equity is a confusing concept, and when it exists, it’s often the central issue to a lemon law case. First, be sure you understand this concept or have a knowledgeable lemon law lawyer California who does, it may affect your strategy with your claim. Be sure you research “negative equity” in lemon law for more information about how to approach your claim.